Entrepreneurship Theory Process And Practice

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lltle: Entrepreneurshlp: theory/process/practice I Donald F. Kuratko, Howard Frederfdc, Allan O'Connor. Edition: 4th edition. ISBN: 9780170352550 (paperback) Notes: Includes Index. Subjects: Entrepreneurship-Textbooks. Entrepreneurshlp--Study and teachlng (Hlgherl Other Creators/Contributors: Frederick, Howard H. author. O'Connor, Allan, author. Dewey Number: 658.421

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v

BRIEF CONTENTS PART 1

ENTREPRENEURSHIP IN THE TWENTY-FIRST CENTURY ............................................................................. 1

1

ENTREPRENEURSHIP: EVOLUTION AND REVOLUTION ..................2

2

THE ENTREPRENEURIAL MIND-SET: COGNITION AND CAREER ....................................................................................39

3

ENTREPRENEURSHIP AND SUSTAINABLE DEVELOPMENT .........62

4

SOCIAL AND ETHICAL ENTREPRENEURSHIP ..............................115

PART 2

INITIATING ENTREPRENEURIAL VENTURES.................. 157

5

PATHWAYS TO ENTREPRENEURIAL VENTURES ..........................158

6

OPPORTUNITY AND THE CREATIVE PURSUIT OF INNOVATIVE IDEAS.........................................................................191

7

ENTREPRENEURIAL FAMILIES: SUCCESSION AND CONTINUITY....................................................................................224

8

DEVELOPING ENTREPRENEURSHIP WITHIN ORGANISATIONS ............................................................................252

PART 3

DEVELOPING ENTREPRENEURIAL VENTURES ............. 289

9

THE ASSESSMENT OF ENTREPRENEURIAL OPPORTUNITIES ....290

10

MARKETING FOR ENTREPRENEURIAL VENTURES .....................330

11

STRATEGIC ENTREPRENEURIAL GROWTH ..................................370

12

GLOBAL OPPORTUNITIES FOR ENTREPRENEURS ......................412

PART 4

GROWTH STRATEGIES FOR ENTREPRENEURIAL VENTURES ...................................................................... 451

13

LEGAL AND REGULATORY CHALLENGES FOR ENTREPRENEURIAL VENTURES ...................................................452

14

SOURCES OF CAPITAL FOR ENTREPRENEURIAL VENTURES ....497

15

MEASURING PERFORMANCE FOR ENTREPRENEURIAL VENTURES ......................................................................................536

16

DEVELOPING A SUSTAINABLE BUSINESS PLAN .........................587

vi

CONTENTS FOREWORD BY CHARLIE HARGROVES.......................................................................... XV GUIDE TO THE TEXT ................................................................................................ XVIII GUIDE TO THE ONLINE RESOURCES ............................................................................ XX PREFACE ................................................................................................................. XXII ACKNOWLEDGEMENTS........................................................................................... XXVII ABOUT THE AUTHORS ........................................................................................... XXVIII

PART 1

ENTREPRENEURSHIP IN THE TWENTY-FIRST CENTURY ....................................................................... 1

CHAPTER 1

ENTREPRENEURSHIP: EVOLUTION AND REVOLUTION .................2 CHAPTER OBJECTIVES.................................................................................... 2

Entrepreneurs facing the unknown ...............................................3 ENTREPRENEURIAL EDGE: CAN 2.5 BILLION GADGETS A YEAR BE GREEN? ............................................................................................ 7

Are you a business or social entrepreneur? .................................8 Entrepreneurs have a particular enterprising mind-set ..............9 The evolution of the ‘under-taking’ ..............................................10 Entrepreneurship through the ages ............................................11 Early definitions of entrepreneurship ..........................................13 Approaches to entrepreneurship .................................................14 ENTREPRENEURIAL EDGE: SPENDING THE OLD MAN’S DOUGH............... 18

The entrepreneurial revolution: a global phenomenon ..............19 CASE 1.1: GAZELLE . . . OR TURTLE?............................................................. 32 CASE 1.2: PAUL CAVE ................................................................................... 32 CHAPTER 2

THE ENTREPRENEURIAL MIND-SET: COGNITION AND CAREER ...................................................................................39 CHAPTER OBJECTIVES.................................................................................. 39

The entrepreneurial mind, behaviour and career .......................40 Who are entrepreneurs?...............................................................43 ENTREPRENEURSHIP IN PRACTICE: ARE YOU CUT OUT TO BE AN ENTREPRENEUR? ............................................................................................ 48

The dark side of entrepreneurship ..............................................48 The entrepreneur’s confrontation with risk ................................49 Stress and the entrepreneur........................................................49 The entrepreneurial ego ...............................................................50 ENTREPRENEURIAL EDGE: DEALING WITH STRESS ................................... 51

Pathways to your entrepreneurial career ...................................52 ENTREPRENEURSHIP IN PRACTICE: THE ENTREPRENEURIAL LIFE CYCLE ....................................................................................................... 53 CASE 2.1: JANE’S EVALUATION .................................................................... 57 CASE 2.2: THE CASHEW CASE PART 1: ARE YOU NUTS?............................. 58

CONTENTS vii

CHAPTER 3

ENTREPRENEURSHIP AND SUSTAINABLE DEVELOPMENT ........62 CHAPTER OBJECTIVES.................................................................................. 62

Entrepreneurship as if the planet mattered................................63 Entrepreneurship in times of crisis .............................................64 Climate change effects for entrepreneurs ..................................67 ENTREPRENEURIAL EDGE: GLOBAL WARMING EFFECTS ON THE ECONOMY .......................................................................................................... 67 ENTREPRENEURIAL EDGE: TOIL-O-PRENEURS IN INDIA ........................... 72 ENTREPRENEURIAL EDGE: HYDROPRENEURS ............................................ 73 ENTREPRENEURSHIP IN PRACTICE: ENTREPRENEURSHIP AND ECOCIDE ............................................................................................................ 75 ENTREPRENEURIAL EDGE: ENTREPRENEURS PROTECTING THE ENVIRONMENT ................................................................................................. 78

Climate change economics for entrepreneurs ...........................80 ENTREPRENEURSHIP IN PRACTICE: SUSTAINABLE TOURISM ON AN AUSTRALIAN ISLE................................................................................ 83 ENTREPRENEURSHIP IN PRACTICE: BUSINESS ADAPTATION TO CLIMATE CHANGE ...................................................................................... 85 ENTREPRENEURSHIP IN PRACTICE: ARE OUR GREAT-GRANDCHILDREN AS VALUABLE AS WE ARE?................................ 87

Entrepreneurial ecology ...............................................................88 ENTREPRENEURSHIP IN PRACTICE: WAYS TO PROFIT FROM DE-GROWTH...................................................................................................... 93 CASE 3.1: RUSS GEORGE: SAVE THE WORLD AND MAKE A LITTLE MONEY ON THE SIDE................................................................... 103 CASE 3.2: THE CARPET CLEANER .............................................................. 107 CHAPTER 4

SOCIAL AND ETHICAL ENTREPRENEURSHIP .............................115 CHAPTER OBJECTIVES................................................................................ 115

Social entrepreneurship .............................................................116 The mind-set of social entrepreneurs .......................................118 ENTREPRENEURIAL EDGE: HOW UNREASONABLE ARE YOU? ................. 119

Ecopreneurs ................................................................................120 Ethics and entrepreneurship......................................................121 Defining entrepreneurial ethics .................................................123 Ethics in the cross-cultural business world .............................125 ENTREPRENEURSHIP IN PRACTICE: SMALL BUSINESS IN CHINA IS ABOUT KNOWING HOW TO BRIBE ................................................................ 127

Entrepreneurship and organised crime ....................................128 Environmental criminal entrepreneurs .....................................129 Entrepreneurship and disadvantaged groups ...........................130 Indigenous entrepreneurs ..........................................................131 ENTREPRENEURIAL EDGE: INDIGENOUS ENTREPRENEURS ................... 133

viii CONTENTS

CASE 4.1: AUSTRALIAN BUCCANEER ENTREPRENEUR EATEN BY CANNIBALS ................................................................................................. 139  CASE 4.2: A LIVING CULTURE, TAMAKI MAORI VILLAGE ........................... 143 ENTREPRENEURIAL CASE ANALYSIS PART 1 ...............................152

PART 2 CHAPTER 5

INITIATING ENTREPRENEURIAL VENTURES............ 157 PATHWAYS TO ENTREPRENEURIAL VENTURES.........................158 CHAPTER OBJECTIVES................................................................................ 158

Walking entrepreneurship pathways .........................................159 Bootstrapping..............................................................................159 ENTREPRENEURSHIP IN PRACTICE: HOW TO BOOTSTRAP A BUSINESS .................................................................................................... 159 ENTREPRENEURSHIP IN PRACTICE: THE RISE OF THE MINIPRENEUR ........................................................................................ 162

The classical pathway: Disruptive new venture creation .........163 ENTREPRENEURSHIP IN PRACTICE: TECHNOLOGY MEETS SOCIAL ENTERPRISE, BUT NOT FOREVER ................................................................ 165

Acquiring an established entrepreneurial venture ...................167 Franchising one’s way into entrepreneurship...........................175 ENTREPRENEURSHIP IN PRACTICE: GROWING ASIAN FRANCHISE OPPORTUNITIES ............................................................................................. 175 ENTREPRENEURIAL EDGE: THE COFFEE CLUB – COFFEE GOES CLUBBY ........................................................................................................... 177

Social venturing as a pathway to entrepreneurship .................179 CASE 5.1: AN IDEA FOR THE BIRDS! .......................................................... 187 CASE 5.2: CHECKING IT OUT ...................................................................... 187 CHAPTER 6

OPPORTUNITY AND THE CREATIVE PURSUIT OF INNOVATIVE IDEAS .............................................................................................191 CHAPTER OBJECTIVES................................................................................ 191

Ideas and the search for opportunity.........................................192 Four models of market-based opportunities ............................194 ENTREPRENEURIAL EDGE: EXPLOITING A DEMAND NICHE..................... 196 ENTREPRENEURIAL EDGE: STICKING TO A RADICAL PLAN ..................... 197 ENTREPRENEURIAL EDGE: COMBINING UNIQUE INSIGHT, EMERGING TECHNOLOGY AND NETWORK KNOWLEDGE .............................................. 199 ENTREPRENEURIAL EDGE: CREATING A SOLUTION TO A SOCIAL PROBLEM THROUGH COMMERCIAL OPPORTUNITY................................... 201

Entrepreneurial imagination and creativity ...............................203 ENTREPRENEURSHIP IN PRACTICE: DEVELOPING CREATIVITY............... 205

Arenas of creativity .....................................................................208

CONTENTS ix

Creating the right setting for creativity......................................209 Innovation and the entrepreneur ...............................................209 The innovation process ...............................................................210 Innovation in the era of climate change ....................................213 ENTREPRENEURSHIP IN PRACTICE: USING CROWDFUNDING TO LAUNCH A SUSTAINABLE VENTURE IDEA............................................. 215 CASE 6.1: INTERFACE ASIA–PACIFIC.......................................................... 219 CASE 6.2: CREATIVITY IS NOT JUST FOR START-UP IDEAS....................... 220 CHAPTER 7

ENTREPRENEURIAL FAMILIES: SUCCESSION AND CONTINUITY ..................................................................................224 CHAPTER OBJECTIVES................................................................................ 224

Entrepreneurship across the generations in the Asia–Pacific ...........................................................................225 ENTREPRENEURIAL EDGE: THIRTEEN-HUNDRED-YEAR-OLD FAMILY BUSINESS: SUCCESSION SECRETS ............................................... 229

Challenges facing family businesses.........................................229 ENTREPRENEURIAL EDGE: WHAT IS A SUSTAINABLE–SUSTAINABLE FAMILY BUSINESS?........................................................................................ 233

Succession as a pathway to entrepreneurship .........................233 Key factors in succession ...........................................................235 ENTREPRENEURSHIP IN PRACTICE: INDIAN BUSINESS FAMILIES GROOM THEIR YOUNGER GENERATION....................................................... 237

Developing a succession strategy..............................................238 Harvesting the venture: recycling wealth within the family .....240 CASE 7.1: JUST AS GOOD AS EVER............................................................. 245 CASE 7.2: NEEDING SOME HELP ON THIS ONE ......................................... 246 CASE 7.3: FAMILY TO FAMILY: THE FALL AND REBIRTH OF DARRELL LEA CHOCOLATES....................................................................... 246 CHAPTER 8

DEVELOPING ENTREPRENEURSHIP WITHIN ORGANISATIONS ...........................................................................252 CHAPTER OBJECTIVES................................................................................ 252

The entrepreneurial mind-set in organisations ........................253 ENTREPRENEURIAL EDGE: ENTREPRENEURIAL EMPLOYEE ACTIVITY AT 3M............................................................................................... 255 ENTREPRENEURSHIP IN PRACTICE: DOES INTRAPRENEURSHIP EXIST IN ASIA? ................................................................................................ 258

Re-engineering organisational thinking ....................................259 Not for businesses only: public sector entrepreneurship ........263 ENTREPRENEURSHIP IN PRACTICE: NEW ZEALAND’S SUCCESS IN COMMERCIALISING GOVERNMENT COMPANIES........................................ 265

Intrapreneurial strategy..............................................................265 Social intrapreneurship by creating shared value ....................272 CASE 8.1: WHICH COMMANDMENTS APPLY? ............................................ 280

x CONTENTS

CASE 8.2: SOUTHWEST AIRLINES: CREATING AN ENTREPRENEURIAL CULTURE..................................................................................................... 281 ENTREPRENEURIAL CASE ANALYSIS PART 2 ...............................286

PART 3 CHAPTER 9

DEVELOPING ENTREPRENEURIAL VENTURES ....... 289 THE ASSESSMENT OF ENTREPRENEURIAL OPPORTUNITIES............................................................................290 CHAPTER OBJECTIVES................................................................................ 290

The elements of an opportunity assessment ............................291 How do we model the entrepreneurial process? ......................291 How to assess an opportunity ....................................................293 When is an idea not an opportunity?..........................................296 The evaluation process ...............................................................297 ENTREPRENEURIAL EDGE: FACING YOUR FEARS! .................................... 299 ENTREPRENEURIAL EDGE: AN ENTREPRENEURIAL OPPORTUNITY OR AN OPPORTUNITY FOR LIFE?........................................ 306

The emergence of entrepreneurial ecosystems .......................311 ENTREPRENEURSHIP IN PRACTICE: ENTREPRENEURIAL ECOSYSTEMS DO MATTER............................................................................. 313 CASE 9.1: EXAMINING THE INDUSTRY....................................................... 319 CASE 9.2: NOTHING UNIQUE TO OFFER .................................................... 319 APPENDIX 9A: FEASIBILITY PLAN OUTLINE ............................................... 324 CHAPTER 10

MARKETING FOR ENTREPRENEURIAL VENTURES ....................330 CHAPTER OBJECTIVES................................................................................ 330

Entrepreneurial marketing is essential.....................................331 Entrepreneurial marketing defined ...........................................332 The components of effective marketing ....................................334 ENTREPRENEURSHIP IN PRACTICE: COMPETITIVE INFORMATION......... 335

Developing a marketing plan .....................................................336 ENTREPRENEURSHIP IN PRACTICE: THE GUERRILLA MARKETING PLAN................................................................................................................ 337 ENTREPRENEURIAL EDGE: PERCEPTIONS OF A TARGET MARKET ......... 339 ENTREPRENEURIAL EDGE: DELL LEARNS YOUNG.................................... 340

Marketing research ....................................................................343 Marketing on the Internet...........................................................347 ENTREPRENEURSHIP IN PRACTICE: SMARTPHONE USERS: SEGMENT YOURSELF..................................................................................... 348

Green entrepreneurial marketing..............................................352 ENTREPRENEURIAL EDGE: GREEN ENTREPRENEURSHIP: THREE KEYS TO STARTING A GREEN INTERNET BUSINESS..................... 353

CONTENTS xi

ENTREPRENEURSHIP IN PRACTICE: WHY YOU MUST HAVE A GREEN BUSINESS BLOG ............................................................................ 353 ENTREPRENEURSHIP IN PRACTICE: WHAT DOES IT TAKE TO REVOLUTIONISE AN INDUSTRY? CHECK OUT ELON MUSK....................... 356

Pricing strategies ........................................................................357 CASE 10.1: DEALING WITH THE COMPETITION ......................................... 363 CASE 10.2: FOR COOKS ONLY .................................................................... 363 CASE 10.3: THE CASHEW CASE PART 2: SO WE HAVE PRODUCTS BUT IS THERE A MARKET? ......................................................................... 364 CHAPTER 11

STRATEGIC ENTREPRENEURIAL GROWTH .................................370 CHAPTER OBJECTIVES................................................................................ 370

Uncertainty and growth: key strategic drivers ..........................371 Entrepreneurial strategy design and planning..........................371 ENTREPRENEURSHIP IN PRACTICE: CREATIVE DESTRUCTION IN THE SHARING ECONOMY....................................................................................... 373

Designing the business model ...................................................378 ENTREPRENEURIAL EDGE: FINE-TUNING A BUSINESS MODEL .............. 380

Does an entrepreneur really want to be a manager?...............380 Managing entrepreneurial growth .............................................384 Entrepreneurs directly influence growth ..................................386 Key management issues encountered during the growth stage ............................................................................................386 ENTREPRENEURSHIP IN PRACTICE: SUCCESSFUL COMPANIES DESIGN BLUEPRINTS FOR HIGH-TECH START-UPS .................................. 390

Unique managerial concerns of growing ventures...................391 Achieving entrepreneurial leadership........................................393 Strategic sustainable development............................................394 ENTREPRENEURSHIP IN PRACTICE: A CLIMATE-CHANGE SWOT............ 396 ENTREPRENEURSHIP IN PRACTICE: STAGES OF SUSTAINABILITY STRATEGY........................................................................................................ 401 CASE 11.1: THE CASHEW CASE PART 3: IS THERE A VIABLE BUSINESS MODEL? ....................................................................................................... 406 CASE 11.2: KEEPING THINGS GOING ......................................................... 407 CHAPTER 12

GLOBAL OPPORTUNITIES FOR ENTREPRENEURS.....................412 CHAPTER OBJECTIVES................................................................................ 412

Asia–Pacific’s entrepreneurial century......................................413 ENTREPRENEURSHIP IN PRACTICE: AUSTRALIA’S YOUNG ‘BORN GLOBAL’ ENTREPRENEURS ............................................................. 416 ENTREPRENEURSHIP IN PRACTICE: HOW SUCCESSFUL CHINESE ENTREPRENEURS REALLY THINK ............................................................... 422

How do I actually go global?.......................................................423 ENTREPRENEURSHIP IN PRACTICE: THE PROS AND CONS OF FRANCHISING IN CHINA .......................................................................... 431

xii CONTENTS

ENTREPRENEURSHIP IN PRACTICE: IMMIGRANT AND REFUGEE ENTREPRENEURS IN AUSTRALIA ................................................................ 433

How to become a born-global entrepreneur.............................433 ENTREPRENEURSHIP IN PRACTICE: WHERE TO FIND GOOD FOREIGN MARKET RESEARCH...................................................................... 436

Born global social entrepreneurs ..............................................439 CASE 12.1: HOME AGAIN ............................................................................ 442 CASE 12.2: ‘I DID IT BECAUSE I DIDN’T KNOW THAT I COULDN’T’............ 443 CASE 12.3: A FOREIGN PROPOSAL............................................................. 443 CASE 12.4: BORN GLOBAL: THE WIGGLES................................................. 444 ENTREPRENEURIAL CASE ANALYSIS PART 3 ...............................448

PART 4

GROWTH STRATEGIES FOR ENTREPRENEURIAL VENTURES.................................................................451

CHAPTER 13

LEGAL AND REGULATORY CHALLENGES FOR ENTREPRENEURIAL VENTURES ..................................................452 CHAPTER OBJECTIVES................................................................................ 452

Legal and regulatory challenges................................................453 Understanding Asia–Pacific regulatory environments .............453 ENTREPRENEURIAL EDGE: ENTREPRENEURS FACE REGULATORY NIGHTMARES.......................................................................... 455

International protections for intellectual property ...................455 ENTREPRENEURSHIP IN PRACTICE: NOTORIOUS ASIAN MARKETS........ 457

Patents.........................................................................................459 ENTREPRENEURSHIP IN PRACTICE: A GENERAL PATENT PROCESS: NOTES............................................................................ 461 ENTREPRENEURSHIP IN PRACTICE: TOP PATENTS THAT INFLUENCED BUSINESS ............................................................................... 464

Copyrights....................................................................................466 ENTREPRENEURSHIP IN PRACTICE: WATCH WHAT YOU SAY! ................. 468 ENTREPRENEURSHIP IN PRACTICE: GOOGLE WAS NOT AMUSED BY THE TRADEMARK PARODY....................................................................... 469

Trademarks .................................................................................469 ENTREPRENEURSHIP IN PRACTICE: WHO OWNS THE COPYRIGHT TO A MONKEY’S SELFIE? ............................................................................... 471

Domain names ............................................................................472 ENTREPRENEURSHIP IN PRACTICE: SOME INTERESTING WIPO UDRP DECISIONS ........................................................................................... 472

Trade secrets ..............................................................................473 Opportunities from changing intellectual property attitudes........................................................................473 Identifying legal structures for entrepreneurial ventures........474

CONTENTS xiii

Incorporated companies.............................................................475 Unincorporated businesses........................................................479 Other business forms .................................................................481 Insolvency and bankruptcy .........................................................483 The legal framework regulating climate change......................484 ENTREPRENEURSHIP IN PRACTICE: EFFECTS OF CLIMATE CHANGE ARE RESTRUCTURING THE BUSINESS ENVIRONMENT IN ASIA–PACIFIC............................................................................................. 486 CASE 13.1: GLORIA’S DECISION.................................................................. 491 CASE 13.2: A PATENT MATTER................................................................... 491 CASE 13.3: NEW ZEALAND AND KIWIFRUIT............................................... 492 CHAPTER 14

SOURCES OF CAPITAL FOR ENTREPRENEURIAL VENTURES .....................................................................................497 CHAPTER OBJECTIVES................................................................................ 497

The times, they are a-changin’...................................................498 What are the forms of entrepreneurial capital? .......................498 Sources of financial capital ........................................................500 ENTREPRENEURSHIP IN PRACTICE: WAYS TO FIND BOOTSTRAP CAPITAL .................................................................................... 501

Debt versus equity.......................................................................502 Equity financing ...........................................................................505 The venture capital market ........................................................507 ENTREPRENEURSHIP IN PRACTICE: VENTURE CAPITALISTS’ DUE DILIGENCE ‘DEAL KILLERS’ ................................................................. 510 ENTREPRENEURSHIP IN PRACTICE: ASKING VENTURE CAPITALISTS THE RIGHT QUESTIONS ................................................................................. 513

Angel financing............................................................................514 New forms of entrepreneurial capital .......................................517 ENTREPRENEURSHIP IN PRACTICE: HOW MICRO-CREDIT WORKS......... 522

Peer-to-peer lending ..................................................................522 ENTREPRENEURSHIP IN PRACTICE: NATURAL CAPITAL IN A CAN OF COLA ......................................................................................... 527 CASE 14.1: LOOKING FOR CAPITAL IN MALAYSIA...................................... 530 CASE 14.2: THE 120 MILLION BAHT VENTURE.......................................... 531 CHAPTER 15

MEASURING PERFORMANCE FOR ENTREPRENEURIAL VENTURES .....................................................................................536 CHAPTER OBJECTIVES................................................................................ 536

The dimensions of performance measurement .......................537 Measuring financial performance..............................................537 Understanding the key financial statements ............................539 ENTREPRENEURIAL EDGE: HOW TO EVOLVE FROM CEO TO CFO ............ 546 ENTREPRENEURSHIP IN PRACTICE: WATCHING YOUR ACCOUNTS RECEIVABLE ............................................................................... 551

xiv CONTENTS

Preparing financial budgets .......................................................552 ENTREPRENEURSHIP IN PRACTICE: CHARACTERISTICS OF CREDIBLE FINANCIALS ................................................................................. 557

Capital budgeting ........................................................................560 ENTREPRENEURIAL EDGE: THE INDIAN ENTREPRENEUR AND THE CUNNING NPV ............................................................................... 562 ENTREPRENEURSHIP IN PRACTICE: WHEN CURRENCY LOSES ITS GLOBAL VALUE ........................................................................................ 566

Break-even analysis ...................................................................566 Financial ratio analysis ...............................................................570 Sustainability performance measures entrepreneurs .............571 Triple bottom line performance measures ...............................574 Sustainability performance measures.......................................576 CASE 15.1: IT’S ALL GREEK TO HER ........................................................... 582 CASE 15.2: THE CONTRACT PROPOSAL..................................................... 584 CHAPTER 16

DEVELOPING A SUSTAINABLE BUSINESS PLAN........................587 CHAPTER OBJECTIVES................................................................................ 587

The need for a sustainable business plan .................................588 ENTREPRENEURSHIP IN PRACTICE: RAY ANDERSON FINDS HIS NORTH STAR............................................................................................ 589

Contrarian views on business planning.....................................590 Benefits of the full-form business plan.....................................592 Writing a well-conceived business plan ....................................594 ENTREPRENEURSHIP IN PRACTICE: PUTTING THE PACKAGE TOGETHER ..................................................................................... 595

How to structure a business plan ..............................................597 ENTREPRENEURSHIP IN PRACTICE: HOW TO GATHER COMPETITIVE INTELLIGENCE IN THE ASIA–PACIFIC.......................................................... 601 ENTREPRENEURSHIP IN PRACTICE: COMMON BUSINESS PLANNING MISTAKES........................................................................................................ 603

Updating the business plan ........................................................614 Presentation of the business plan: the ‘pitch’...........................614 ENTREPRENEURSHIP IN PRACTICE: BUSINESS PLANNING RESOURCES .................................................................................................... 616

A practical example: Cocoa Samoa Ltd.....................................616 CASE 16.1: GETTING IT RIGHT BY DOING IT WRONG................................ 619 CASE 16.2: IT’S JUST A MATTER OF TIME .................................................. 619 CASE 16.3: THE INCOMPLETE PLAN........................................................... 619 ENTREPRENEURIAL CASE ANALYSIS PART 4 ...............................622

APPENDIX: BUSINESS PLAN – REVIVING SAMOA’S COCOA INDUSTRY ........................ 625 GLOSSARY............................................................................................................... 664 INDEX ..................................................................................................................... 684

xv

FOREWORD Reading through this manuscript I was impressed with the authors’ obvious passion for entrepreneurship, along with their rigorous approach in considering the opportunities for entrepreneurs to take a leading role in our world’s transition to a sustainable future. When talking with the authors, one thing that really resonated with me was their belief that entrepreneurs could thrive in uncertainty, and this got me very excited. Sustainable development is perhaps the biggest and most uncertain challenge our species has ever faced. Having first been inspired by the concept of sustainable development back in the early 2000s, I have dedicated my professional career to making a contribution to accelerating our world’s transition to a sustainable future. During this time I have had the pleasure of working with some amazing world-changing people who have spent decades building the understanding we need to inform this transition. These dedicated people have included eco-entrepreneur and educator Hunter Lovins, scientist and politician Ernst von Weizsa¨cker, environmental physicist Amory Lovins, sustainable transport expert Peter Newman, eco-entrepreneur Gunter Pauli, Green Party leader Johnathan Porritt, cleaner production expert Don Huisingh, and pioneering sustainability consultant Alan AtKission. The work of these eco-revolutionaries, along with countless others across all disciplines and sectors, means that we now have much of the technology and know-how needed to achieve sustainable development. However, many lament that applying this know-how to secure a sustainable future is not happening fast enough, and ask: why is that? After 15 years of asking myself the same question, I think part of the answer is the overwhelming complexity of changing our massive industrial systems, and part is the resistance from those who profit from pollution. The reason I am so excited about this book is that it presents tools to overcome both challenges. In order to take on the complexity involved in changing our systems we need to understand how to be entrepreneurial in the face of uncertainty, and in doing so create new opportunities for profit and economic development. I strongly believe that if teams around the world harness the tools of an entrepreneurial approach we can truly accelerate efforts and avoid the looming crisis. It may in fact be the case that entrepreneurship is the missing link that will unlock the available potential through a focus on sustainable development. There is often debate around what ‘sustainability’ or ‘sustainable development’ actually means, and this debate over definitions has hindered progress. In simple terms, sustainability means the ‘ability to sustain’. This is not as emotive as other definitions you may find, but the value of thinking of it this way is that it begs the question what do we want to sustain? And then comes the big second question: How do we sustain it? Most people would agree that we want to sustain and share ongoing prosperity, clean water and air, an educated and engaged workforce, and strong and vibrant communities. That question is pretty easy to answer. The tricky part comes when we ask: how we will actually sustain it? Harking back to the early work of John Elkington on the ‘Triple Bottom Line’ may provide some guidance here, despite it often being reduced to a cliche´. The reality is that we don’t know what it means to be sustainable, but if we want to increase the likelihood of sustainability, we need to achieve strong performance in all three areas of economy, environment, and society – a challenge truly worthy of lifetime dedication, as Alan AtKission once told me.

xvi FOREWORD

In order to increase the likelihood of sustaining the quality of life we have spent centuries developing, and sharing this with the entire world, we need to focus on all three areas. Simply put, given that most of the world operates in a market-based system the projects, products and infrastructure of the future need to deliver acceptable economic returns. As we are generating pollution at a level that is affecting our planet’s biosphere we need to ensure that such impacts are minimised, and given that our population is growing more rapidly than at any other time in human history we also need to ensure that people are involved and taken care of in the process. On face value this may seem like a pretty simple task – a few green buildings here and a few solar panels there – however, the complexity of transitioning our societies to operate in a way that has a high likelihood of being sustained is enormous. Calling for new innovative approaches, it is truly the time of the entrepreneur. However, the world will not be saved by individual entrepreneurs alone. Yes, we need those people who can drive innovation and deliver revolutionary technology, like engineer and futurist Nicola Tesla or eco-entrepreneur Elon Musk. Yet, if we are to achieve the changes we need across our planet’s enormous and complex economies, we will need teams of creative and innovative people in every part of the economy taking an entrepreneurial approach. In order for entrepreneurs to navigate the uncertainty of the future, they will need to have a solid understanding of how sustainable development-related issues – such as climate change, resource shortages, poverty, population changes and biodiversity – will impact the economy. Entrepreneurs need to identify viable areas for investment that can deliver medium-to-long-term returns. In the face of significant global challenges, this book provides a critical resource for those looking to harness the enormous power of the market to deliver ongoing prosperity. The realisation that the pollution created in our race to industrialise over the last 250 years – with entrepreneurs playing a key part – has had a real impact on the planet’s very functioning, was quite a shock to many in the 1980s and 1990s. But it is worse than that. The growing level of industrial pollution is not only impacting the planet, it is now directly impacting the economy. The early decades of the twenty-first century have become a turning point in human history. This book provides a valuable overview and training manual for entrepreneurs in a range of issues related to sustainable development that will enhance the understanding of the future conditions in the economy; a valuable resource indeed. The book lays out a clear framework for considering opportunities across many complex areas of sustainable development and I look forward to seeing the efforts of the students of this work as our species undertakes a mid-course correction. As Interface CEO Ray Anderson once put it: towards a way of life that can be sustained for all on this amazing little planet. Dr Karlson ‘Charlie’ Hargroves Sustainability Transitions Researcher, strategist and author (co-author of five international bestselling books on sustainable development, translated into six languages, including The Natural Advantage of Nations, Factor 5 and Cents and Sustainability).

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GUIDE TO THE TEXT xix

xx

GUIDE TO THE ONLINE RESOURCES xxi

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PREFACE Entrepreneurship is increasingly being recognised as a means to stimulate change and growth within and across national economies. This in turn elevates the expectations of teachers and students of entrepreneurship. Entrepreneurship teachers are expected to engage with more disciplines, developing skills among all those who may potentially have good ideas to start new businesses. The ultimate aim is to provide the human capital foundations of a new or renewed economy. Entrepreneurship students are in turn expected to engage in elevated risk for the benefit of the broader community and create businesses and social organisations that generate prosperity and wealth. In current times we also face the looming crisis of human-induced climate change. The question this scenario raises for readers and users of this book is; are you ready to take on a career that calls for leadership, demands that you grow as an individual and be independent? Are you ready at the same time to rely on the support of others in order to create social and economic good for our world? If you are reading this, then you probably are, so let’s get started. Your authors, and entrepreneurship academics generally, are often asked two questions. First off, does education matter for an entrepreneur? Well, yes and no. There is a goodly portion of entrepreneurs (maybe as high as 15 per cent) who never had patience with education. Nor did their teachers have much patience with them! Research even indicates that some entrepreneurs have Attention Deficit Hyperactivity Disorder (ADHD) and they find it difficult to focus in school and complete their schoolwork. There also seems to be a higher incidence of dyslexia in young entrepreneurs than in the general population.1 Another portion are simply so curious and adventuresome that they cannot tolerate the one-way flow of teaching from ‘learned ones’ and are, therefore, just turned off by education. Many famous entrepreneurs never finished school. But the fact is that education and entrepreneurship are highly correlated – the more education you have, the more likely you are to engage successfully in entrepreneurship. Even if you have just one class in entrepreneurship, you are more likely to become an entrepreneur, more likely be self-employed, have potentially higher annual incomes, and set up your own business after graduation, compared to your peers. The next confronting question for any entrepreneurship academic is, can we actually teach entrepreneurship? Again, yes and no. Yes, students can learn it and it takes two forms. The first is education that helps learners to discover whether there is a spark within themselves. The second is that teaching facilitates learning the skills, both in mind and in practice that characterises your own personal form of entrepreneurship. What teachers can and should do is create a world where students can learn to be an entrepreneur by becoming more confident in their abilities and learning skills needed to achieve success in a social or business venture. But the answer is also no, when you think of most classrooms. It’s not about PowerPoint presentations and lectures; instead, it’s about having experiences and creating opportunities for entrepreneurship. In those precious minutes together with learners, an entrepreneurship educator needs to provide content that is both enabling and experiential, where you can sit at the elbow of real entrepreneurs, be challenged by the real problems of an entrepreneur, be given access to tools and techniques to work through those problems and ultimately, where you can learn the craft of entrepreneurship.

THE DISTINCTIVE CHARACTER OF THIS BOOK This textbook illustrates the broadest variety of sustainable entrepreneurship in the Asia–Pacific in the twenty-first century in a manner as unique and creative as our region itself. We believe that this is the first entrepreneurship textbook with people, planet and profits – the 3P’s – at its base.

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The leitmotif of this book is personal enterprise; wherever it exists, whenever it exists, and whatever it is – social, environmental, business; the list is endless. It is about being the sole proprietor of the rest of your life. It is about the ‘enterprising spirit’ that everyone has at birth, and that some choose to nurture and others do not. It is that spirit of true creativity and inventiveness, of curiosity and daring, of calculated risk against great gain. Sadly, this burning spirit can be extinguished by parents, by the church or an oppressive society, by the conformism of the school system, by crime or civil war, or by cultural proscriptions. But it is always there in every person, even later in life, if only the right conditions should emerge and should they elect to take the journey. Some people think that the spirit of enterprise is the world’s most powerful economic and social force. It is what marks us as human beings. For hundreds of years now, The Entrepreneurial Revolution has captured the imagination and now permeates society, culture, business and education. Here we are, well into the twenty-first century with hundreds of millions of entrepreneurs engaged in starting and running new businesses. Entrepreneurs’ roles are changing as the Earth and the economy change. Today’s entrepreneurs are faced with ever more complex challenges. The process of transforming creative ideas into commercially viable, socially just and environmentally sustainable enterprises continues to be a major force in the world economy. From artists to zoologists, the enterprising spirit can emerge from any person. We believe that a basic course in entrepreneurship should be a required field of study for every student. After all, think of some of the professions that are highly self-employed – artists, real-estate brokers, photographers, musicians, designers, writers, financial advisors, management analysts and interior designers. Beyond this, think of the creative and innovative people in civil society groups, non-government organisations, not-for-profits, community trusts and social enterprises. Our motto for this Asia–Pacific text edition continues to be Entrepreneurship as if the planet mattered. This is not just a matter that is talked about, but something we all can do something about. Think of it this way: virtually every phase of the production of this book contributed to global warming, from harvesting trees to production of pulp and paper, transportation, waste management and eventual disposal. The pulp, paper and publishing industries, not to mention readers themselves, have significant impacts on people and communities all around the world. As authors, we are committed to preventing negative impacts of book publishing on natural forests, the global climate or the rights of forest-dependent communities. We are happy that our publisher, Cengage Learning in Melbourne, has switched to 100 per cent post-consumer waste recycled paper for all office printing and that the content of this book is now available for download online. Solving the problems of human-induced climate change requires our readers to share responsibility. The most effective way to reduce the negative impacts of this book is to use the knowledge in it very efficiently. In our teaching we are committed to a ‘3e’ learning environment that supports (e)learning, (e)nvironmentally friendly strategies, and (e)xperiential assignments. Our teachers and students are encouraged to submit assignments online, use online filing systems, reuse paper, adopt electronic note taking, adjust printing to greyscale, recycle classroom waste material, use electronic databases, and use of the library to avoid needless paper consumption. Moreover and importantly, we encourage our students to create ventures that improve, or at least do no further harm to, our natural world.

ORGANISATION Text, cases and exercises that appear in this Asia-Pacific edition of Entrepreneurship: Theory, Process, Practice bring together, in one place, the most significant resources for exploring the

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development of new and emerging business and social ventures. Our aim has been to present these resources in an exciting, organised and challenging manner that relates to our world’s triple challenge: overcoming and reversing the effects of social, economic and environmental decline. Every chapter – from performance measures to marketing, from strategy to start-up, from ethics to family business – includes an in-depth section relating this topic to the book’s main theme of ‘People, Planet and Profit’. We put together this book in order to compact and synthesise a large body of knowledge for the budding entrepreneur and enterprising spirit of all types. Our aims are to simplify, condense, organise and translate a vast area of knowledge into a form useful for building commercially viable, socially and environmentally responsible projects of all sorts. We have taken ideas from multiple sources – especially the North American edition of this book – and repackaged them to make a new whole. As the American Historical Association says, textbooks are different from other scholarly writing in the ‘form of attribution, and the permissible extent of dependence on prior scholarship’.2 Within our organisation and accumulation of knowledge on Asia– Pacific entrepreneurship, we have cited more than 2000 authors in the field and aim to provide ready access to their works, including hundreds of hyperlinks. The chapter sequence in this fourth edition is systematically organised around ‘Pathways to Entrepreneurship’. We all have our individual pathways and people follow different paths to become successful entrepreneurs (see below). We believe the book can be used over two semesters at the undergraduate. The first eight chapters serve one academic course in ‘Foundations of Innovation & Entrepreneurship’. The second eight chapters compose another course called ‘New Venture Creation’. Or, the entire book can be covered in an accelerated fashion in master’s level classes. The 16 chapters compose four Parts to the book. Each contains four chapters that specifically address these pertinent concepts of entrepreneurship: • Part 1 (Chapters 1–4) is named ‘Entrepreneurship in the twenty-first century’. It introduces the entrepreneurial mind-set and examines entrepreneurship as evolution and revolution. This part reveals the evolving nature of entrepreneurship and its importance to the entire global economy, to civil society and to the planet itself. Part 1 reviews the fundamentals of the environment of the economy and the economy of entrepreneurship. This includes the basics of climate change and climate-change economics, as well as the emerging field of entrepreneurial ecology. Finally, we focus on social entrepreneurship and the ethical perspective that entrepreneurs need to take in developing a morally conscious approach to business, one that safeguards society and the planet. • Part 2 (Chapters 5–8) is named ‘Initiating entrepreneurial ventures’. Here, we spell out a major theme throughout the book by outlining the pathways to entrepreneurship and dealing with the question of how people become entrepreneurs. Starting with bootstrapping (starting a venture with minimal capital), micro-enterprise and mini-preneurs, we gradually build toward delving into more complex ventures with the pursuit of ideas and opportunity recognition by examining the creativity of individuals and the concept of innovation. We discuss the unique and culturally determined pathways that an entrepreneur might take to launch a new venture, whether starting a brand new venture, acquiring an existing firm, franchising or expanding a social enterprise. One common pathway is family business, so we look at their importance and unique problems. We look at intrapreneurship, also called ‘corporate entrepreneurship’, which exists and can be cultivated in every large organisation.

PREFACE xxv

• Part 3 (Chapters 9–12) is entitled ‘Developing entrepreneurial ventures’. This part includes the methods of assessing new ventures and business opportunities, as well as a discussion of the issues in marketing that affect the preparing, planning and operating of entrepreneurial startups. The need for strategic planning, the challenge of managing entrepreneurial growth, and the global opportunities available to entrepreneurs are all discussed. • Part 4 (Chapters 13–16) is called ‘Growth strategies for entrepreneurial ventures’ and reviews business and environmental regulations, looks at intellectual property, and compares legal forms of business organisation across the Asia–Pacific. This part has a thorough examination of the sources of capital, including social capital and natural capital, available to entrepreneurs. The performance measures that all entrepreneurs need also are discussed. Finally, the development of a clear and comprehensive sustainable business plan is examined. Chapter 17, ‘Reviving Samoa’s Cocoa Industry: Cocoa Samoa Ltd’, contains a complete illustrative sustainable business plan that aims to attract capital to revitalise the Samoan Cocoa industry. In an effort to make the fourth Asia–Pacific edition of Entrepreneurship: Theory, Process, Practice the most comprehensive text available in our region, at the end of each chapter you will find a wealth of endnotes with the Asia–Pacific region especially in mind. These references have been carefully selected and updated to 2016 in order to provide professors and students with a thorough background of the latest research that relates to the entrepreneurship material being presented. All hyperlinks were current as at July 2015.

NEW AND UPDATED CONTENT A beautiful new set of teaching PowerPoints has been developed for teachers. These include copious notes relevant to lecture material. The slides include hundreds of images that make the PowerPoint slides a delight to look at. In addition to the experiential exercises, we know that teachers must convey serious content, and that reading and watching are two good ways to accomplish that. A major innovation to this fourth edition has been the extensive development of the Pathways Approach to Entrepreneurship. While learning entrepreneurship from others is of course useful and beneficial, at some point to be an entrepreneur, you have to take the first steps into setting up and taking responsibility for your own venture or business initiative. To be ready to be the captain of your own venture there are a number of pathways that will contribute to your preparedness and development. The following outlines how the specific content for the pathways concept is distributed throughout the book: • Chapter 1, page 18, discusses the pathways principle and on page 22, is detailed how entrepreneurship acts as a pathway to freedom. • Chapter 3, page 65, deals with finding a pathway to your climate-resilient future. • Chapter 4, page 130, includes pathways considerations for entrepreneurship and disadvantaged groups. • Chapter 5 was promoted to fifth position as the dedicated Pathways Chapter to entrepreneurial ventures and includes several pathways discussion: – Page 159, keeping the cost down and finding ways to bootstrapping a pathway to entrepreneurship is outlined. – Page 160, discusses business assistance funding while page 161, focuses on Minipreneurship as a pathway before the classical pathway, disruptive new venture creation is specifically described on page 163. – Page 167, switches to discuss acquiring an established entrepreneurial venture as a pathway

xxvi PREFACE

– Page 175, covers the option of buying a franchise as a pathway, and – Page 179, addresses establishing a social venture as a pathway. • Chapter 7, takes one common pathway, the family business option in detail with particular discussion on page 233, on succession and page 240, harvesting the venture; that is, recycling wealth within the family. • Chapter 8, also dedicates an entire chapter to entrepreneurship within established organisations as a pathway. In addition to the pathways approach as a major new contribution, a number of specific topics have been updated and/or added to this edition. These include in Chapter 2 an expanded discussion on new venture stage transitions and the required competencies and skills that assist in making these transitions as an entrepreneur. Chapter 3 is entirely updated to the latest knowledge about our warming planet and about opportunities for entrepreneurs to take advantage of climate change. In Chapter 6 a section is now included on Blue Ocean Strategy to assist entrepreneurs to think about the spaces and voids left by established competitors. Crowdfunding is also introduced in this chapter before a more extensive discussion of it occurs in Chapter 14. In Chapter 9 the increasingly popular topic of entrepreneurial ecosystems is addressed to start entrepreneurs and their supporters thinking about the context within which they start ventures. Chapter 10 now extensively covers social media and mobile communications for marketing and in Chapter 11, more is dedicated to designing the business model. Chapter 15 now includes an outline discussion on sensitivity analysis or the ‘what if’ scenario tool to assist entrepreneurs in thinking about assumptions embedded within their business plans. Along this same line, more is dedicated to the Lean Start-up in Chapter 16 that prompts entrepreneurs to systematically test their business models in conjunction with their planning processes. Lastly, a new, comprehensive business plan is added in Chapter 17 on the re-establishment of a Samoan Chocolate industry to provide the backbone of focused discussion on how business plans play a role in entrepreneurship.

COURSEMATE EXPRESS AND ONLINE RESOURCES This edition also includes additional online resources called CourseMate Express for students and professors using this book. The online material facilitates a ‘blended learning approach’. The website has links, videos, quizzes, games, other cases and business plans and interactive exercises. It implements the authors’ philosophy that ‘teaching is best done online and learning is best done in the classroom’. Beyond the dozens of activities, cases and exercises that you will find in the text, there are more than 150 more that you will find in the online environment.

ENDNOTES 1 Brogan, C. (2010). The new attention deficit. Entrepreneur, 38(12), 70; Huber, J. (1994). Rebel with a business. Entrepreneur, 22(6), 148; Nicolaou, N., Shane, S., Adi, G., Mangino, M., & Harris, J. (2011). A polymorphism associated with entrepreneurship: Evidence from dopamine receptor candidate genes. Small Business Economics, 36(2), 151–55; Scudamore, B. (2009). Given to distraction. Profit, 28(2), 13; Logan J. (2009). Dyslexic entrepreneurs: The incidence, their coping strategies and their business skills. Dyslexia, 15, 328–46; Franks, K., & Frederick, H. (2012 in press) Dyslexic and entrepreneur: Typologies, commonalities and differences. Journal of Asia Entrepreneurship and Sustainability. 2 American Historical Association, ‘Statement on standards of professional conduct’, Approved by Professional Division, 9 December 2004 and adopted by Council, 6 January 2005 www.historians.org/PUBS/free/ professionalstandards.cfm?pv=y.

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ACKNOWLEDGEMENTS The authors would especially like to thank colleagues in the entrepreneurship education field who have made significant contributions to this book past and present. These include Dennis Foley, Norashidah Hashim, Armanurah Mohamad, Norita Deraman, Gary Hancock, Fiona Kerr and Paul Daly. All of the past case studies have been retained and included in the CourseMate Resources online. The current edition case contributors include Ella Henry, Jodyanne Kirkwood, Anna Guenther, Silvia Torres Carbonell, Sebastian Cadenas, and Sara Walton. Thanks also to Gerard Reed for his assistance provided by developing the case teaching materials and Martin Pannall of Madderns Patent and Trademark Attorneys for his assistance with and contributions to the legal chapter. And, to Murray Hunter from the University of Northern Malaysia for his contributions to Initiating Entrepreneurial Ventures. The authors and Cengage Learning Australia would like to thank JodyAnne Kirkwood for her work on the online resources for this fourth edition, and the following reviewers for their incisive and helpful feedback: John McElvaney, Deakin University Colin Jones, University of Tasmania Jodyanne Kirkwood, Otago University Morgan P. Miles, University of Tasmania. Every attempt has been made to trace and acknowledge copyright holders. Where the attempt has been unsuccessful, the publishers welcome information that would redress the situation.

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ABOUT THE AUTHORS Professor Dr Howard H ‘Frederico’ Frederick is Research Professor in the Centre for Entrepreneurial Culture at Mexico’s leading private university, the Tecnolo´gico de Monterrey, or Monterrey Institute of Technology. More entrepreneur than professor, he teaches Entrepreneurial Leadership and advises young entrepreneurs in the Technology Park, especially in the field of climate change entrepreneurship. Monterrey Tec is one of the select universities in the world where every one of the 98 000 students on 31 campuses takes the Entrepreneurial Leadership course. Howard has been teaching Entrepreneurship for more than fifteen years. He was Professor of Entrepreneurship Education at Deakin University in Melbourne and New Zealand’s longest-serving Professor of Innovation & Entrepreneurship; and Director, New Zealand Centre for Innovation & Entrepreneurship, at Unitec New Zealand in Auckland. He was previously a Distinguished Fulbright Professor in Austria, Mexico and the German Democratic Republic; Senior Scholar, University of Southern California, USA; and Professor and Chair in Global Communication, Victoria University of Wellington, New Zealand. However, Howard’s entrepreneurial true love is the Sweet Art. With his partner, for thirteen years he has co-managed and operated Melbourne’s leading chocolate and tea degustation environment, Ma´mor Chocolates & High Tea Szalo´n Pty Ltd, which you will see mentioned frequently in this book. Yes, somebody has to do it! Howard is a graduate of Stanford University, San Francisco State University and The American University, and has broad European, Latin American and Asia-Pacific experience. Fluent in Spanish and German, he is recognised as an authority in the field of ICT, business innovation and economic development, especially in the developing areas of Latin America and Asia. His students have launched successful businesses ranging from water-testing equipment to cosmetic manufacturing, functional food products and an organic escalator cleaner. Howard learned business skills from his forestry family in the Pacific Northwest of the USA. His grandfather ran a lumber mill and his father was a commercial lumberman. His mother was the ultimate creative industries entrepreneur, even running her own modelling agency. Frederick’s PhD work focused on economic development in developing economies. Dr Allan J O’Connor is the Academic Director of post-graduate programs in Innovation and Entrepreneurship at the Entrepreneurship Commercialisation and Innovation Centre (ECIC), The University of Adelaide, Australia. With qualifications that include a Master in Enterprise Innovation and a PhD that focused on issues of public policy for entrepreneurship education and economic development, he has taught entrepreneurship topics that include Strategy, Innovation Management, Business Plan, Opportunity Evaluation, and New Ventures and Research Methods, since 2001. Allan’s research interests lie at the intersections between entrepreneurship and socioeconomic development. Entrepreneurship has been at the core of much of Allan’s life experience. Entrepreneurship has served as a means of transition. From leveraging his skills at age 18 as a musician to buy a business and support his education and training in mechanical engineering, to undertaking an intrapreneurial venture to grow the market presence of his then-employer, and later venturing out on his own to develop and market innovative physical products and intangible consulting services, Allan has walked the path of innovation and entrepreneurship and faced market challenges that demand new thinking.

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Later in life, Allan discovered the joy and passion of higher learning and is enjoying the challenges of an entrepreneurial academic career. Increasingly, Allan is engaged in research that is designed to advise governments in matters of innovation and entrepreneurship that drives regional competitiveness. With the assistance of funding from the South Australian state government, in 2014–15 Allan led the development of the Australian Cluster Observatory and has embarked on pioneering research into the entrepreneurial ecosystem in South Australia. His growing portfolio of more than fifty research publications including internationally peer reviewed journal articles, book chapters, conference papers, and research reports, is testament to the significance of his research agenda and contribution to his research field. Dr Donald F Kuratko (known as ‘Dr K’) is the Jack M. Gill Chair of Entrepreneurship; Professor of Entrepreneurship and Executive Director, The Johnson Center for Entrepreneurship & Innovation, The Kelley School of Business, Indiana University, Bloomington, USA. Dr Kuratko is considered a prominent scholar and national leader in the field of entrepreneurship. He has published more than 180 articles on aspects of entrepreneurship, new venture development and corporate entrepreneurship. Professor Kuratko has authored 30 books, including the leading entrepreneurship book in American universities today, Entrepreneurship: Theory, Process, Practice, ninth edition (South-Western/Cengage Learning, 2014, 2009). In addition, Dr Kuratko has been consultant on corporate innovation and entrepreneurial strategies to a number of major corporations, such as Anthem Blue Cross/Blue Shield, AT&T, United Technologies, Ameritech, Walgreens, McKesson, Union Carbide Corporation, ServiceMaster and TruServ. Under Dr Kuratko’s leadership, Indiana University’s Entrepreneurship Program has consistently been ranked as the #1 university for entrepreneurship research by the Global Entrepreneurship Productivity Rankings; the #1 University Entrepreneurship Program in the United States (public universities) by Fortune; and the #1 Graduate Business School (Public Institutions) for Entrepreneurship and the #1 Undergraduate Business School for Entrepreneurship (Public Institutions) by U.S. News & World Report. In addition, Indiana University was awarded the National Model MBA Program in Entrepreneurship for the MBA Program in Entrepreneurship & Innovation developed by Dr Kuratko. Dr Kuratko’s honours include earning the Entrepreneur of the Year for the state of Indiana (sponsored by Ernst & Young and Inc. magazine) and being inducted into the Institute of American Entrepreneurs Hall of Fame. Dr Kuratko was named the National Outstanding Entrepreneurship Educator by the US Association for Small Business and Entrepreneurship and he has been honoured with the John E. Hughes Entrepreneurial Advocacy Award for his career achievements in entrepreneurship and corporate innovation. He was selected one of the Top Entrepreneurship Professors in the United States by Fortune. The National Academy of Management has honoured Dr Kuratko with one of their highest awards bestowed in entrepreneurship, the Entrepreneurship Advocate Award, for development and advancement of the discipline of entrepreneurship. Dr Kuratko has been named one of the Top 50 Entrepreneurship Scholars in the world and was the recipient of the Riata Distinguished Entrepreneurship Scholar Award (presented by the School of Entrepreneurship at Oklahoma State University) in 2010. In 2011 he was the inaugural recipient of the Karl Vesper Entrepreneurship Pioneer Award for his career dedication to developing the field of entrepreneurship.

»

PART « ONE

ENTREPRENEURSHIP IN THE TWENTY-FIRST CENTURY

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

Entrepreneurship: evolution and revolution

The entrepreneurial mind-set: cognition and career

Entrepreneurship and sustainable development

Social and ethical entrepreneurship

Entrepreneurship

» CHAPTER ONE ENTREPRENEURSHIP: EVOLUTION AND REVOLUTION CHAPTER OBJECTIVES

1

To begin our exploration of entrepreneurship and the environment

We are on the precipice of climate system tipping points beyond which there is no redemption.

2 To distinguish between business and social entrepreneurs

James Hansen, Director, NASA Goddard Institute, President George W. Bush’s top climate modeller1

4 To explain the importance of entrepreneurs for economic growth

Most of what you hear about entrepreneurship is all wrong. It’s not magic; it’s not mysterious; and it has nothing to do with genes. It’s a discipline and, like any discipline, it can be learned.

6 To define entrepreneurship and explore the major schools of entrepreneurial thought

Peter F. Drucker2

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

3 To distinguish between entrepreneurs and small-business owners

5 To examine the historical development of entrepreneurs and of entrepreneurship

7 To realise that entrepreneurship is a pathway to freedom

Chapter 1: Entrepreneurship: evolution and revolution 3

ENTREPRENEURS FACING THE UNKNOWN Hold on to your hats. You are in for a roller-coaster ride. This book starts with some startling information and you may wonder what it means for entrepreneurs. FIGURE 1.1 ROLLER COASTER ENTREPRENEUR CARL MILER’S MASTERWORK DESTROYED BY RISING SEA LEVELS AFTER GLOBAL WARMING INDUCED HURRICANE SANDY (US)

Source: The Jetstar roller coaster damaged by hurricane Sandy in October 2012, Seaside Heights, New Jersey, published by Flickr.com, ª 2013.

Let’s start by looking at one of America’s famous ‘roller coaster entrepreneurs’, Carl Miler and his brilliant idea that made him millions – the portable roller coaster. He recounted: The market for roller coasters is a pretty risky financial venture; suppose the thing is a complete failure, what do you do with it? The secret is to come up with a good collapsible rig that’s as exciting as any you’ve ever ridden, but that can be taken down and moved at short notice. And it’s worth a lot of patents, I can assure you.3

How could Miler possibly guess that within half a century one of his great innovations, the Jet Star portable roller coaster at Casino Pier, New Jersey (USA), would be swept away by the rising seas of a global warming-induced hurricane? Today, entrepreneurs have to take such calamities into account. What is today’s entrepreneur to do? Perhaps invent a floating portable roller coaster? Human-induced climate change is one of the greatest challenges facing the human race in the twenty-first century.4 As this book goes to press, the World Meteorological Organization reported that 2014 was the hottest year since records were kept. Climate change contributes to increased frequency of natural disasters, rise in flows of refugees, and global conflict over food and water. The effects of climate change are felt from the Arctic to the Antarctic. Some even attribute the Syrian conflict to climate change because of that regime’s failure to manage water and land, followed by a drought, and displacement of millions of people. Areas of the Asia-Pacific, including Australia, could face the displacement of millions of people due to sea-level rise, leading to a breakdown in security due to climate change. Climate change is a threat to our security, indeed to our very survival.5 All of us – entrepreneurs included – now face ‘existential risks’. Those are events that can cripple civilisation or even cause the extinction of the human race. Already recorded in history are such events as super-volcanoes and asteroids that led dinosaurs into extinction. But today, humancaused, or anthropogenic, events also threaten the survival of life on Earth. Three modern

4 Part 1: Entrepreneurship in the twenty-first century

Go to Coursemate Express to read how Grameen bank is funding solar-powered entrepreneurs in Dubai

existential risks are particularly threatening: nuclear war, bioterrorism and global warming. We will leave aside the first two as outside of this book’s scope, but prognosticators of the third existential threat, global warming, put the risk of human extinction from climate change in the twenty-first century at 10–20 per cent.6 The authoritative Stern Review on the Economics of Climate Change (2006) used an extinction probability of 0.1 per cent per year in calculating an effective social discount rate. That makes a 9.5 per cent chance of human extinction by the end of a century.7 (See the discussion on discount rate in Chapter 3, ‘Are our great-grandchildren as valuable as we are?’, on page 87.) You may ask what any of this has to do with entrepreneurs? Entrepreneurs are part of the problem and perhaps the greatest hope for the solutions. Since the Industrial Revolution in the late eighteenth and early nineteenth centuries, many business entrepreneurs around the world have simply plundered and exploited the environment in ignorance, without any thought for sustainability. Early entrepreneurs were the first to see the possibility that fossilised coal and gas could fuel industry as well as power our dreams and innovations. Before we started warming the planet, the global average temperature was about 14 degrees Celsius and the Earth’s atmosphere contained about 280 parts per million of carbon dioxide. Once our entrepreneurial forefathers began to burn coal and gas to power their lives and realise their ambitions, the carbon emissions in the atmosphere started to increase. By the time scientists started measuring it in the 1950s, it had already risen to 315 parts per million. Now it’s at 390–400 and increasing two points per year.8 By adding enormous quantities of CO2 and other greenhouse gases to the atmosphere over the last 150 years, enterprising human being have changed the world’s climate and entrepreneurs must share some of the blame. A few degrees of temperature increase may not sound much, but the extra heat that CO2 traps is enough to warm the planet considerably. To date, international agreements have targets to limit global warming to 2 degrees Celsius above pre-industrial levels. Yet, that little bit per year has started melting almost every frozen region on Earth. It has already changed sea levels and seasons and has been linked to more ferocious storms (see Figure 1.1) and more extreme bushfires. Even modest temperature rises affect hundreds of millions of people, particularly in the developing world. What happens if we miss the agreed-upon 2 degrees Celsius goal and reach 4 or 8 degrees of warming? No human life can live at those temperatures, and Australia is the most vulnerable continent to climate change impacts.9 And so it is no exaggeration to say that entrepreneurs such as Thomas Edison and Henry Ford played a major role in contributing to the climate crisis, and that an entrepreneur (perhaps one like Elon Musk with his electric car using new battery technology – see Chapter 10, p. 356) can help ease the problem. Let’s look at it graphically. In 2013, the world was already emitting 9861 million tonnes of carbon. That is equivalent to 36 131 million tonnes of CO2.10 Using the Greenhouse Gas Equivalencies Calculator,11 we can visualise just how much that global output. For example, 7.6 billion passenger vehicles would produce that much carbon; or 927 billion new tree seedlings would sequester (take out and store) that much carbon (see Figure 1.2). Who are the greatest carbon offenders? Table 1.1 lists regions and countries that emit the most total carbon into the atmosphere. Asia–Pacific countries produce 46 per cent of the world’s CO2. The People’s Republic of China now contributes around 28 per cent of global CO2 emissions, compared with a US contribution of around 14 per cent and the 28 states of the European Union combining to produce a further 10 per cent. Looking at global emissions in per capita terms, the biggest emitters are Australia, the United States, Saudi Arabia and Canada.

Chapter 1: Entrepreneurship: evolution and revolution 5

FIGURE 1.2

WORLD CARBON EQUIVALENTS IN 2013

ANNUAL GREENHOUSE GAS EMISSIONS EQUATES TO:

CO2 GAS EMISSIONS EQUATES TO:

CARBON SEQUESTERED BY:

Passenger vehicles

7 612 000 000

Gallons of gasoline consumed

4 068 527 062 001

Tree seedlings grown for 10 years

927 102 564 103

Miles/year driven by average passenger vehicle

86 088 095 238 090

Pounds of coal burned

38 836 734 693 870

Acres of US forests in one year

29 636 885 246

Tonnes of waste sent to the landfill

12 959 498 208

Tanker trucks’ worth of fuel

478 647 074

Acres of US forest preserved from conversion to cropland in one year

279 183 075

Rubbish trucks of waste recycled instead of landfill

1 853 254 741

Homes’ energy use for one year

3 298 996 350

Each cell in this table is equivalent to global yearly carbon output of 9861 million tonnes of carbon in 2013. Sources: Adapted from Global Carbon Budget, Global Carbon project and Greenhouse Gas Equivalencies Calculator, Clean Energy Resources, EPA.

TABLE 1.1

CARBON EMISSIONS BY COUNTRY AND REGION

CARBON EMISSIONS BY COUNTRY AND REGION, 2013, MILLION METRIC TONNES

World

9861

100%

Asia

4584

46%

OECD

3367

34%

China

2723

28%

North America

1693

17%

Europe

1600

16%

United States of America

1428

14%

EU28

951

10%

India

657

7%

Middle East

612

6%

Russian Federation

495

5%

Source: Global Carbon Budget, http://www.globalcarbonproject.org/carbonbudget/14/data.htm. Copyright ª 2013 by Global Carbon Project. Used by permission.

6 Part 1: Entrepreneurship in the twenty-first century

And it is not just large companies that are to blame. Small-scale entrepreneurs have made a 10 per cent contribution to the planetary crisis of global warming by helping to destroy areas of rainforest.12 This alone is a significant contributor to climate change because tropical forests are best at sequestering carbon from the atmosphere. In an attempt to better themselves by increasing their standards of living, entrepreneurial families as well as large companies in such places as Brazil and Indonesia have cleared vast stretches of rainforest, releasing megatonnes of CO2, and it will take decades to restore these ‘lungs of the Earth’. Quantifying the human cost of all this damage is complex. The Stern Review assessed the business case. It said that doing nothing about climate change is far more expensive and risky than taking immediate measures. The ‘business as usual’ approach would mean at a minimum a 5 per cent average decrease in global per capita consumption ‘now and forever’.13 Projections by the US National Research Council warn that the seas could rise a further 56 to 200 cm during the twenty-first century. Areas endangered by the encroaching ocean include New Orleans, New York, Miami, Venice, Bangkok, Shanghai, the Netherlands, Bangladesh and the Maldives.14 Low-lying island nations are already vulnerable, as is a huge swathe of Bangladesh where millions live. (See ‘Global warming effects on the economy’ in Chapter 3, p. 67.) Yet drought also is becoming more prevalent, especially in all of Australia, Southern Europe and most of the United States.15 FIGURE 1.3 GLOBAL LAND AND SEA TEMPERATURES SINCE 1880

1.00

Global temperature anomaly (°C) Land temperature anomaly (°C) Ocean temperature anomaly (°C)

Degrees Celsius

0.75 0.50 0.25 0.00 –0.25 –0.50

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Source: Adapted from ‘Global Analysis – Annual 2014, Various Global Temperature Time Series’, National Climate Data Center, NASA Goddard Institute for Space Studies.

WHY WE ARE HOPEFUL How can we as entrepreneurs stop (or at least ameliorate) this global environmental catastrophe? It’s not rocket science. In fact, most of the technologies we need to improve the situation already exist, developed by entrepreneurs and inventors in the last quarter century. What we need is a commitment to take what we already know how to do, make it cheaper and spread it to every corner of every economy in the world. Business as usual is dead and green growth is the answer to both climate and

Chapter 1: Entrepreneurship: evolution and revolution 7

economic problems. Again, who is best positioned to commercialise existing innovations and create new technologies? It’s entrepreneurs! Why? Because in their history entrepreneurs have never wasted a good crisis. Over half of the Fortune 500 were created during a recession or bear market.16 Capitalism is in crisis and natural resources are declining, yet entrepreneurs have an opportunity to rebuild the world in a way that carries on adding value and making wealth while keeping social and environmental solutions at its heart. It is entrepreneurs who recognise opportunities where others see chaos or confusion. They are the aggressive catalysts for change within the marketplace. They are the athletes challenging themselves to break new barriers, marathon runners dealing with the agony of the last few kilometres, the symphony orchestra conductors bringing together different skills and sounds into a cohesive whole, and the top-gun pilots continually pushing the envelope of speed and daring. In the new reality of climate change, entrepreneurs could well be the saviours of the planet. They can choose between being the villains or the heroes of today’s marketplace. They can start companies and create jobs at a breathtaking pace. History shows us that entrepreneurship is a wellspring of economic growth, social renewal and personal development, and that new entrepreneurial ventures are the way to bolster a flagging economy. Economic and planetary problems can only increase entrepreneurs’ willingness to stop working for someone else and do something good for themselves and others by taking on the challenge and starting their own business. Economies around the world have evolved and have been repeatedly revitalised because of the efforts of entrepreneurs as it is the passion, promotion, networking and drive of entrepreneurs that move the whole society forward.17 They take the unknown as a challenge and continuously influence the path of the future. It is their ideas, savings, investment and innovation that lead to development. They are the ones who can alleviate poverty by contributing to economic growth and job creation. Climate change is the greatest challenge of our time and the stakes could not be higher for entrepreneurs. There are huge rewards for those that embrace innovation to lead the transition to a low-carbon economy. Entrepreneurs can unleash a wave of creativity not seen since the Industrial Revolution. They must be at the forefront of the fight against climate change. ‘We have to start thinking out of the box’, says Rajendra Pachauri, Nobel Prize winner and chair of the Intergovernmental Panel on Climate Change (IPCC). ‘Entrepreneurs who respond to the challenge will reap commercial success – while businesses which fail to do so face oblivion’.18 Throughout the world, there is enough young entrepreneurial energy to build a world that overcomes these challenges – if we invest in the intentional development of entrepreneurs. That’s what this book is all about.

CAN 2.5 BILLION GADGETS A YEAR BE GREEN? It was predicted we would buy 2.5 billion mobiles, computers and tablets in 2014 and there would be more Internet connected devices than people on the planet. As the number of gadgets we own explodes, how they are made, used and disposed of becomes more important than ever. Take dangerous e-waste: in 2012, electronics devices were already creating nearly 8 kg of e-waste for every person on the planet. Without truly progressive, innovative solutions from the industry, the combined environmental impact of our gadgets will just keep growing.

ENTREPRENEURIAL EDGE

cont.

»

8 Part 1: Entrepreneurship in the twenty-first century cont.

The problems • E-waste: Making billions of devices that often last for just a couple of years is a) incredibly resource intensive and b) incredibly wasteful if all the energy, raw materials and chemicals used in electronics are discarded as e-waste. • Toxic truth: Many of the hazardous substances currently used in the products and in manufacturing can damage human health and the environment, especially in manufacturing centres in China, Taiwan, South Korea and Japan. • Designed for the dump: Today many of our products are designed to become obsolete with no or little ability to repair or upgrade, fuelling a throwaway culture that leads to greater resource consumption and creating mountains of waste. The Solutions • An energy revolution: Increasing renewable energy use in manufacturing is key to reducing the environmental footprint of our products. Apple is building the world’s first electronics components factory powered only by renewable energy. With solar power growing fast in manufacturing centres like China and Japan, wouldn’t it be great if our devices were made with 100 per cent renewable energy? • A toxic-free future: Half of the mobile phone market is now free of the worst hazardous chemicals, up from zero in 2006. That’s progress. What if companies extended that to all products and followed the example of leading clothing brands by ‘detoxing’ their entire supply chains? It’s possible. Our gadgets should not come at the price of human health or the safety of our future generations. • Design innovation: Products made to last: The sector must shift to providing products that have a long lifespan and are easily upgraded and repairable. As more and more devices are sold we must make sure we can get the most out of the resources and energy used in electronics manufacturing. Sources: Adapted from Blogpost, Tom Dowdall, 3 September 2014. See Cobbing, M. & Dowdall, T., ‘Green gadgets: Designing the future’ (Amsterdam: Greenpeace International, 2014), http://www.greenpeace.org/international/en/publications/Campaign-reports /Toxics-reports/Green-Gadgets/; Gartner Group, Press Release, ‘Gartner says worldwide traditional pc, tablet, ultramobile and mobile phone shipments are on pace to grow 6.9 percent in 2014’, http://www.gartner.com/newsroom/id/ 2692318; Sparkes, M., ‘Apple ‘‘leads the way’’ on reducing environmental harm’, Daily Telegraph, 3 September 2014, http://www.telegraph.co.uk/technology/apple/11070662/Apple-leads-the-way-on-reducingenvironmental-harm.html.

ARE YOU A BUSINESS OR SOCIAL ENTREPRENEUR?

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There are many kinds of entrepreneurs. The word ‘entrepreneur’ is very flexible in the English language. A seniorpreneur is someone who starts a business after the age of 55. A copreneur is someone who works with the entrepreneur, such as the spouse, an accountant or a supplier. Biopreneurs work in biotechnology, biology and the environment. There are (believe it or not!) academicpreneurs (we call them pracademics, such as your authors). There are cross-cultural entrepreneurs, mediapreneurs, end-poverty entrepreneurs, transparency-and-fairness entrepreneurs, social entrepreneurs, social-privatisation entrepreneurs, world-citizen entrepreneurs, intrapreneurs, knowledge-collaboration entrepreneurs, cultural entrepreneurs and biodiversity entrepreneurs. But for the present we will look at, and distinguish between, three main terms. Business entrepreneurs are driven by the profit motive. They seek growth and profits within the business world. They are constant innovators and always trying to capture larger market shares from a competitive marketplace. They are pioneering individualists who create one venture after another and one innovation after another. Social entrepreneurs have many of the same personality characteristics as business entrepreneurs, but they are driven by a mission and seek to find innovative ways to solve problems that are not being or cannot be addressed by either the market or the public sector.19 Both business and social entrepreneurs seek innovation and growth. They thrive in both small enterprises and large organisations. They have a mind-set that separates them from the rest of the population.

Chapter 1: Entrepreneurship: evolution and revolution 9

The terms entrepreneur and small business owner are sometimes used interchangeably, but that is incorrect. Although some situations encompass both terms, it is important to note the difference in the following definition. Small-business owners may once have captured an opportunity like an entrepreneur but then they rest on their laurels because either they or the opportunity – or both – do not continue to have the attributes that make it entrepreneurial. The business may never grow large and the business owner may prefer a more stable and less aggressive approach to running their business. Many smallbusiness owners often like stable sales, profits and modest growth and want to keep the business at a size they can personally manage and control. These are not entrepreneurs but small-business managers. The difference is that small-business owners would rather exploit existing equilibrium opportunities and optimise supply and demand in established markets. Entrepreneurs, on the other hand, aim to exploit innovative venture opportunities and create new markets at home and abroad. In this book, we concentrate on business and social entrepreneurs. Much of the content relates to the broadest range of sectors, from profit to non-profit and from government institutions to large businesses. But as far as small business is concerned, many of the particular points in this book may apply to both small-business owners and entrepreneurs. However, keep in mind that our focus is on the aspects of innovation and growth associated with business and social entrepreneurs, not with small-business managers and managing a small venture.

ENTREPRENEURS HAVE A PARTICULAR ENTERPRISING MIND-SET Entrepreneurship is more than the mere creation of a business or a social enterprise. Although that is certainly an important facet, it is not the complete picture. The characteristics of seeking opportunities, taking risks beyond security and having the tenacity to push an idea through to reality combine into a special perspective that permeates entrepreneurs. Some people are born with it while others, as Peter Drucker says in the epigraph at the top of this chapter, can develop an entrepreneurial mind-set. This mind-set can be exhibited inside or outside an organisation, in profit or non-profit enterprises and in business or non-business activities for the purpose of bringing forth creative ideas. Thus entrepreneurship is an integrated concept that permeates an individual’s enterprise in an innovative manner. It is this mind-set that has revolutionised the way business and social ventures are conducted at every level and in every country. (This is a major theme in this book. See also Chapter 2, ‘The entrepreneurial mind-set: cognition and career’; Chapter 8, ‘Developing entrepreneurship within organisations’; and Chapter 11, ‘Strategic entrepreneurial growth’.) Look at the mind-set of the crew of the Starship Enterprise in the famous TV show Star Trek. They definitely had entrepreneurial qualities. The mission of the Starship Enterprise was ‘to boldly go where no [one] has gone before’. This means having the nerve to face the unknown. ‘Space… the final frontier’ is all about finding new markets. ‘These are the voyages of the Starship Enterprise’ is all about planning for the future. ‘To explore strange new worlds, to seek out new life and new civilisations’ is just like the entrepreneur’s ability to explore, learn and adapt. Today, the word enterprise (or enterprising) is still used as an ‘attitude to life, an attitude of exploring, of developing, of leading and of taking initiatives’. Enterprise – as in an enterprising individual – is the process of identifying, developing and bringing a vision to life, be it an innovative

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10 Part 1: Entrepreneurship in the twenty-first century

idea or simply a better way of doing something. Enterprise applies not only to business ventures, but also to political and social decisions.20 English is fortunate in having two complementary words. (Some languages do not make this distinction.) Enterprising means ‘marked by imagination, initiative and readiness to undertake new projects’. Entrepreneurial means ‘willing to take risks in order to create value’. Anyone – from an artist to a zoologist – can be enterprising. Entrepreneurship has a more business connotation. Both terms, whether inside or outside of business, mean that a person is the sole proprietor of the rest of their life, of their own destiny.

THE EVOLUTION OF THE ‘UNDER-TAKING’ The word entrepreneur is derived from the French entreprendre, meaning ‘to take in between’, or ‘to undertake’. English doesn’t really have its own word for entrepreneur – or better said, it once had such a word but lost it. We use the French word in English because the proper word for entrepreneur, ‘undertaker’ (someone who undertakes, a word used by the original theorists of entrepreneurship), is now used by another profession (namely morticians and funeral directors)! Here’s a famous joke reputed to George W. Bush: US President George W. Bush, Britain’s Prime Minister Tony Blair and France’s President Jacques Chirac were at a summit meeting in Paris to discuss the economy and, in particular, the decline of the French economy. George Bush leaned over to Tony Blair and whispered, ‘the problem with the French, Tony, is that they don’t have a word for entrepreneur’.

Seriously though, in English and in most Romance languages, the entrepreneur is someone who undertakes to organise, manage and assume the risks of a business. The definition is broadened so that today an entrepreneur is considered to be a social or business innovator or developer who recognises and seizes opportunities; converts those opportunities into workable/marketable ideas; adds value through time, effort, money or skills; assumes the risks of the competitive marketplace to implement these ideas; and realises the rewards from those efforts.21 Not all languages follow this ‘undertaker model’. In Malay, usahawan means someone who does a commercial activity at some financial risk. In the Thai language, the word for entrepreneur is pupagongan, which means literally ‘someone who assembles other people together’. In Indonesian, wiraswasta has the signification of ‘courageous private sector’. In the Garinagala language of Australian Aborigines, they use egargal or ‘story-teller’ to mean entrepreneurs. The Maori language of the Polynesians of New Zealand has two words for entrepreneurship. Ngira tuitui means the ‘needle that binds things together’. The other word is tinihanga a Maui, or the ‘tricks of Maui’. Maui in Polynesian mythology is a demigod and cultural hero famous for his exploits and trickery. Maori admire his entrepreneurial spirit, heroism, altruism and brashness. Take the following story, for example: Every day Maui’s brothers went fishing, but they always refused to take Maui with them because they were afraid of his magical tricks. One day, however, Maui hid in their canoe and revealed himself when they were far out to sea. Maui drew out his fishhook made from the magical jawbone of his grandmother, baited it with some blood from his nose, and then lowered it deep down in the ocean … Maui pulled the greatest of all fishes into the boat … and it miraculously turned itself into land that became the islands of New Zealand.22

However we say it, the entrepreneur is the aggressive catalyst for change in the world of business. They are independent thinkers who dare to be different in a background of common events. Research

Chapter 1: Entrepreneurship: evolution and revolution 11

reveals that many entrepreneurs have certain characteristics in common, including the ability to consolidate resources, management skills, a desire for autonomy and risk taking. Other characteristics include brashness, competitiveness, goal-oriented behaviour, confidence, opportunistic behaviour, intuitiveness, pragmatism, the ability to learn from mistakes and the ability to employ human relations skills.23 Although no single definition of entrepreneur exists and no one profile can represent today’s entrepreneur, research is providing an increasingly sharper focus on the subject. A brief review of the history of entrepreneurship illustrates this.

ENTREPRENEURSHIP THROUGH THE AGES Throughout history there have been enterprising individuals who spotted and exploited smart opportunities. But as humans developed a sense of individualism, these ‘dreamers who do’, as innovation expert Gifford Pinchot famously called them, have often faced daunting, even life-threatening, challenges to realise their dreams. Entrepreneurs frequently experienced prejudice, discrimination and even death for their beliefs and activities. Even in 2015, when xenophobia raises its ugly head, it is often enterprising immigrant entrepreneurs (e.g. Somali shopkeepers in South Africa) who are first killed.24 Were there entrepreneurs in the Palaeolithic period 40 000 years ago? From a Darwinian perspective, perhaps there were. Risk-tolerant traits probably generated evolutionary advantage (see Chapter 3, ‘Darwinian theory of entrepreneurship and climate change’, on p. 97). In today’s terminology we probably would say that a primitive hunter-gatherer who developed a new weapon might have been seeking niche advantage in the wild marketplace. As hunting technology developed some people started to accumulate a surplus and then turned from their struggle for mere survival into using their accumulated wealth and knowledge to start settled communities. Some clever people must also have decided to lend their capital and knowledge to others for personal gain or the benefit of the clan, but in a collective society it was better to hide such individual gain. Data from anthropology tell us that entrepreneurial wealth creation has existed for millennia. Excavated business tablets show that innovation and entrepreneurship were key aspects in civilisations that have long disappeared.25 Ancient Assyrians (their empire was in today’s Iraq) carried out innovation transfer, had a corps of knowledge workers and developed business communication.26 The Assyrians inherited a system of private enterprise from Sumer and Babylon. Wingham believes that entrepreneurship as we know it today developed in the eleventh century BCE in ancient Phoenicia.27 A sailing nation of merchants and traders, the Phoenicians peacefully connected a commercial empire that ranged from Syria in the east to Spain and even Ireland in the west. Phoenician traders were the Star Trekkers of their age – true entrepreneurs who took risks, explored the unknown and faced chaos on a daily basis. Certainly they returned profit to investors, merchants and themselves. This peaceful trading nation was swept aside by the bellicose and avaricious Persian Empire, and with it the concept of the risk-taking ‘undertaker’. In biblical times an enterprising individual with high ability and independence faced prejudices that societies had against usury (charging a fee for the use of money), which in the Bible was viewed as a great crime. Ezekiel 18:13 says: ‘He lends at usury and takes excessive interest. Will such a man live? He will not! Because he has done all these detestable things, he will surely be put to death and his blood will be on his own head’. Imagine looking for niche advantage in those times. The Romans did permit usury, but, curiously, not by Romans themselves. Any business enterprise by a nobleman actually led to loss of prestige. Wealth accumulation was highly valued as long as it did not involve a nobleman’s participation in industry or commerce.28 In Rome there was no absence

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12 Part 1: Entrepreneurship in the twenty-first century

of wealth creation, only of commerce. Landholding and usury were the usual routes to wealth creation: ‘Money poured in from booty, indemnities, provincial taxes, loans and miscellaneous extractions’.29 This aversion to commerce among the nobility left the way open for entrepreneurial freedmen, former slaves who were set up by their masters to run the businesses. Slavery may have been one of the few avenues to commercial advancement for people of the lower classes. Amazing as it may sound, in ancient Rome, innovation and profit were completely disconnected. Certainly, Romans made considerable advances in technology, but this was divorced from commerce. Pliny writes that one day an inventor came before Emperor Tiberius to show him his invention of an unbreakable glass window and to beseech him for an inventor’s fee. Tiberius asked whether he had told anyone the formula. The man assured him that the invention was absolutely secret, whereupon the emperor immediately cut his head off ‘lest gold be reduced to the value of mud’. The sad lesson of this story is that the inventor had to turn to the emperor for a reward rather than to a venture capitalist for investment – nor could he protect his intellectual property!30 Turning to medieval China, how could an entrepreneur begin a venture when the monarch owned all the property? When the emperor needed cash, he simply seized it from his wealthy noblemen. This meant that no one would invest in a productive enterprise for fear of losing it so easily. Only scholarship and officialdom were routes to success and value was tied up in land, not enterprise. Wealth came to those who passed examinations and gained government positions. In contrast, Islam has always promoted business entrepreneurship. Though Islam prohibited pork, alcohol, gambling, prostitution and usury, Muslims were otherwise free to invest their money in any economic activity and to produce, trade and consume in whatever way they wished. Trade and commerce have always been a part of Islam. From pre-Islamic days, the Holy City of Mecca has been the centre of commercial activities. There is no basic conflict between good business practice and profit making in Islam. One scholar of entrepreneurship from Turkey writes that in the spring of 595 CE, businesswoman Lady Khadija had a dream telling her to hire a man named Mohammed as her trade agent because of his honesty and stamina on the long camel routes. Indeed, writes Adas, had the Prophet Mohammed lived today ‘on his business card it would have been written ‘‘exporter and importer’’ ’.31 Meanwhile in Europe in the Middle Ages, great wealth and power came not from business acumen, but from military conquest. Innovations such as armour, the crossbow and gunpowder were needed for military campaigns, not retail shops. In King Arthur’s court, boys learned warfare as the accepted means for accumulating wealth. Indeed, Mark Twain’s A Connecticut Yankee in King Arthur’s Court skewers the Round Table when an American entrepreneur is magically transported back to the past, sets up an enterprise academy and a competing weapons factory, and makes a deal with the King to take a percentage of the increase in the gross kingdom product. As Europe moved from a feudal economy to nascent capitalism, conditions began to change. Merchant entrepreneurs excelled in shipbuilding, built global trading networks and used advanced weaponry to protect them. Forms of usury appeared, such as loans to rulers, leased monopolies, buying on credit, fixed exchange rates and so forth. Merchant entrepreneurs became major players in European politics, and the owners of shipping fleets and banks produced descendants who, like the Medici, could become secular rulers or even popes.32 By the late Middle Ages, the revival of towns saw tax-free zones and emancipated serfs, leading to the growth of an entrepreneurial spirit. The sad fact is that until the Industrial Revolution of the late eighteenth and early nineteenth centuries, in Europe at least, an entrepreneur’s life could lead to decapitation, death on the battlefield or appropriation by the emperor. Hardly a conducive environment!

Chapter 1: Entrepreneurship: evolution and revolution 13

As perilous as the profession may have been, the entrepreneurial spirit has driven many of humanity’s achievements. Indeed, some say not much has really changed. Multinational corporations existed in Assyria. Ancient Greeks had brand-name competitions. Business travel was not unknown to Marco Polo. There were industry clusters in Phoenicia. Creative and innovative forms of free enterprise endured, sometimes for centuries.33 Humanity’s progress from caves to campuses has been explained in numerous ways, but central to virtually all of these explanations has been the role of the agent of change, the force that initiates and implements material progress. New thinking even sees a Darwinian aspect. Just like selected organisms in biological systems, entrepreneurs are at the cutting edge of developing, retaining and selecting information useful to survival.34 Today, we recognise that the agent of change in human history has been and most likely will continue to be the entrepreneur.35 Rugged individualists, those who cherish individual liberty and self-reliance, frequently found themselves opposed to authority and to controls over the individual. At the core of it was the mantra that entrepreneurs ‘mind their own business’ (as in take charge of or look after themselves). Entrepreneurs today may well be the proto-typical sovereign individuals. In The Sovereign Individual, Davidson and Rees-Mogg see history as roughly 500-year cycles – from Athens’ glory and decline (500 BCE), to the dawn of Christianity and the fall of Rome (500 CE), to the emergence of feudalism (1000 CE) and its collapse around 1500. Each cycle sees the rigid grip of the governmental system ultimately breaking down and the (temporary) liberation of individuals from undesirable controls. The authors say that in the modern age citizens no longer need be beholden to the authority of a nation-state. Tomorrow’s entrepreneurs will reside on the Internet and select where to reside and do business based on cost versus profit. They will comparison-shop for services (utilities, police protection and even currency) in a marketplace no longer dominated by state monopolies.36

EARLY DEFINITIONS OF ENTREPRENEURSHIP The recognition of entrepreneurs as a class dates back to eighteenth-century France when IrishFrench banker and investor Richard Cantillon associated entrepreneurs with ‘risk-bearing’ activity in the economy.37 In England during the same period, the Industrial Revolution was growing and the entrepreneur played a visible role in risk taking and the transformation of resources.38 Economists have long claimed the word as their own. In fact, until the 1950s, the majority of definitions and references to entrepreneurship had come from economists. For example, Richard Cantillon (1680–1734), renowned French economist Jean Baptiste Say (1767–1832) and twentiethcentury economic genius Joseph Schumpeter (1883–1950) all wrote about entrepreneurship and its impact on economic development.39 Over the decades, writers have continued to try to describe or define what entrepreneurship is all about. Here are some examples: Entrepreneurship … consists in doing things that are not generally done in the ordinary course of business routine; it is essentially a phenomenon that comes under the wider aspect of leadership.40 Entrepreneurship, at least in all non-authoritarian societies, constitutes a bridge between society as a whole, especially the non-economic aspects of that society, and the profit-oriented institutions established to take advantage of its economic endowments and to satisfy, as best they can, its economic desires.41 In … entrepreneurship, there is agreement that we are talking about a kind of behaviour that includes: (1) initiative taking, (2) the organizing or reorganizing of social economic mechanisms to turn resources and situations to practical account, and (3) the acceptance of risk of failure.42

14 Part 1: Entrepreneurship in the twenty-first century

Significant writers have long argued whether or not an entrepreneur creates equilibrium or disequilibrium, is risk-bearing, capital-owning, exceptional, a leader or just a combiner of factors and more innovative or more alert than the general population.43 After reviewing the evolution of entrepreneurship and examining its varying definitions, Ronstadt put together a summary description: Entrepreneurship is the dynamic process of creating incremental wealth. This wealth is created by individuals who assume the major risks in terms of equity, time, and/or career commitment of providing value for some product or service. The product or service itself may or may not be new or unique but value must somehow be infused by the entrepreneur by securing and allocating the necessary skills and resources.44

In the twentieth century, the word entrepreneur has become linked with free enterprise and capitalism. Also, it was generally recognised that entrepreneurs serve as agents of change; provide creative, innovative ideas for business enterprises; and help businesses grow and become profitable. It has now become associated with people who create added value, whether that be social or business value. Because of a variety of financial scandals blamed on ‘rampant entrepreneurism’, the word entrepreneur sometimes carries a negative connotation outside the US. Whatever the specific activity they engage in, entrepreneurs in the twenty-first century are today considered heroes of free enterprise and social venturing. Many of them use innovation and creativity to build highly valued social and business enterprises from fledgling ventures. These individuals create new products and services and assume the risks associated with these ventures. Many people now regard entrepreneurship as pioneership on the frontier of business. Increasingly, entrepreneurs are being seen as key to solving the puzzle of global warming and climate change. In recognising the importance of the evolution of entrepreneurship into the twenty-first century, we have developed an integrated definition that acknowledges the critical factors needed for this phenomenon: Entrepreneurship is a dynamic process of vision, change and creation. It requires an application of energy and passion towards the creation and implementation of new value-adding ideas and creative solutions. Essential ingredients include the willingness to take calculated risks in terms of time, equity or career; the ability to formulate an effective venture team; the creative skill to marshal needed resources; and, finally, the vision to recognise opportunity where others see chaos, contradiction and confusion.

APPROACHES TO ENTREPRENEURSHIP To understand the nature of entrepreneurship and better recognise its emerging importance, it is important to consider some of its theory development. The research on entrepreneurship has grown dramatically over the years. As the field has developed, research methodology has progressed from empirical surveys of entrepreneurs to more contextual and process-oriented research. Theory development is what drives a field of study. Entrepreneurship theory has been developing for at least 40 years and it is apparent that the field is growing. It is important to understand some of that development to better appreciate the discipline of entrepreneurship. The study of the basic theories in the field also helps to form a foundation upon which a student can build an understanding of the process and practice of entrepreneurship. A theory of entrepreneurship is defined as a verifiable and logically coherent formulation of relationships or underlying principles that explain entrepreneurship. These principles predict entrepreneurial activity (for example, by characterising conditions that are likely to lead to value creation or social opportunities and the formation of new enterprises), or provide normative guidance

Chapter 1: Entrepreneurship: evolution and revolution 15

(that is, prescribe the right action in particular circumstances).45 In the new millennium, it has become increasingly apparent that we need to have some cohesive theories or classifications to better understand this emerging field. In the study of contemporary entrepreneurship, one concept recurs: entrepreneurship is interdisciplinary, which means combining fields and crossing boundaries between disciplines or schools of thought. As such, it contains various approaches that can increase one’s understanding of the field.46 Therefore, we need to recognise the diversity of theories as an emergence of entrepreneurial understanding. One way to examine these theories is within a ‘schools-of-thought’ approach that divides entrepreneurship into specific activities. These activities may be within a macro view or a micro view, yet all address the conceptual nature of entrepreneurship.

THE SCHOOLS OF ENTREPRENEURIAL THOUGHT A school of thought is a body of belief, literature or theory that is accepted as authoritative by a group of scholars or writers. In this section we will highlight the ideas emanating from the macro (meaning ‘wide-scale’ perspective) and micro (meaning ‘small-scale’) views of entrepreneurial thought. We will further break down these two major views into seven distinct schools of thought (see Figure 1.4). We don’t claim to limit the number schools of thought to these seven. It is simply organising some of our knowledge in an efficient way. Social and cultural school of thought Macro view

Financial/capital school of thought Displacement school of thought Ecological school of thought Entrepreneurial trait school of thought (people school)

Micro view

Venture opportunity school of thought Strategic planning school of thought

The macro view The macro view of entrepreneurship presents a broad array of external factors, such as education, physical infrastructure, culture and financing, that relate to success or failure in contemporary entrepreneurial ventures. This assortment of factors includes external processes that are sometimes beyond the control of the individual entrepreneur, for they exhibit a strong external locus of control point of view. Four schools of entrepreneurial thought represent a breakdown of the macro view. The first of these is the broadest and most pervasive school. • The social and cultural school of thought: This school of thought deals with external factors and surrounding conditions and influences that affect a potential entrepreneur’s lifestyle. These contexts can be either positive or negative forces in the moulding of entrepreneurial desires. The focus is on institutions, values and social mores that, grouped together, form a socio-political environmental framework that strongly influences the development of entrepreneurs.47 For example, if a middle manager experiences the freedom and support to develop ideas, initiate contracts, or create and institute new methods, the work

FIGURE 1.4 ENTREPRENEURIAL SCHOOLS OF THOUGHT

16 Part 1: Entrepreneurship in the twenty-first century

environment will serve to promote that person’s desire to pursue an entrepreneurial career. (We call this type of person an ‘intrapreneur’. See Chapter 8.) Another environmental factor that often affects the potential development of entrepreneurs is their social group. The atmosphere of friends and relatives can influence the desire to become an entrepreneur. Migrants are also more entrepreneurial than native residents of a country. In the United States, for example, certain immigrant groups, such as Koreans, Jews, Greeks and Italians, have been more likely to launch start-ups. • The financial/capital school of thought: The financial/capital school of thought is based on the capital-seeking process – the search for seed and growth capital is the entire focus of this entrepreneurial emphasis. Certain literature is devoted specifically to this process, whereas other sources tend to treat it as but one segment of the entrepreneurial venture.48 In any case, capital seeking is vital to an entrepreneur’s development. Business planning guides and texts for entrepreneurs emphasise this phase, and development seminars often focus on the funds application process. This school of thought views the entire entrepreneurial venture from a financial management standpoint. As is apparent from Table 1.2, decisions involving finances occur at every major point in the venture process. TABLE 1.2

FINANCIAL ANALYSIS EMPHASIS

VENTURE STAGE

FINANCIAL CONSIDERATION

DECISION

Start-up or acquisition

Seed capital

Proceed or abandon

Venture capital sources Ongoing

Cash management

Maintain, increase or reduce size

Investments Financial analysis and evaluation Decline or succession

Profit question

Sell, retire or dissolve operations

Corporate buyout Succession question

• The displacement school of thought: The displacement school of thought focuses on the negative side of group phenomena, in which someone feels out of place – or is literally ‘displaced’ – from the group. This theory holds that sometimes the social group hinders a person from advancing or eliminates certain critical factors needed for that person to advance. As a result, the frustrated individual will be projected into an entrepreneurial pursuit out of his or her own motivations to succeed. As researchers have noted, individuals fight adversity and tend to pursue a venture when they are prevented or displaced from doing other activities.49 Three major types of displacement illustrate this school of thought: – Political displacement: This is caused by factors ranging from an entire political regime that rejects free enterprise to governmental regulations and policies that limit or redirect certain industries. – Cultural displacement: This deals with social groups precluded from professional fields. Ethnic background, religion, race and sex are examples of factors that figure in the minority experience. Increasingly this experience will turn various individuals from standard business professions towards entrepreneurial ventures.

Chapter 1: Entrepreneurship: evolution and revolution 17

– Economic displacement: This is concerned with the economic variations of recession and depression. Job loss, capital shrinkage or simply bad times can create the foundation for entrepreneurial pursuits, just as they can affect venture development and reduction. These examples of displacement illustrate the external forces that can influence the development of entrepreneurship. Cultural awareness, knowledge of political and public policy and economic indoctrination will aid and improve entrepreneurial understanding under the displacement school of thought. The broader the educational base in economics and political science, the stronger the entrepreneurial understanding. • The ecological school of entrepreneurial thought: This new school of thought comes from the growing perception of the natural world and our relationship to it as entrepreneurs. It is based on the idea that everything is related with everything everywhere. The systems which uphold life on the planet can no longer endure the wanton exploitation and consumption that entrepreneurs have subjected them to. This school of thought is based on the fields of green economics and ecological economics. It is defined by its focus on intergenerational equity, irreversibility of environmental change, uncertainty of long-term outcomes and sustainable development. Ecological entrepreneurship looks at the metabolism of new venture creation; that is, the study of the flows of energy and materials that enter and exit entrepreneurial businesses.50

The micro view The micro view of entrepreneurship examines the factors that are specific to entrepreneurship and are part of the internal locus of control. The potential entrepreneur has the ability, or control, to direct or adjust the outcome of each major influence in this view. As part of this approach we present entrepreneurial trait theory (sometimes referred to as the ‘people school of thought’), venture opportunity theory and strategic planning theory. Unlike the macro approach, which focuses on events from the outside looking in, the micro approach concentrates on specifics from the inside looking out. The first of these schools of thought is the most widely recognised in the field of entrepreneurship research. • The entrepreneurial trait school of thought: Many researchers and writers have been interested in identifying traits common to successful entrepreneurs.51 This approach is grounded in the study of successful people who tend to exhibit similar characteristics that, if copied, would increase success opportunities for the emulators. For example, achievement, creativity, determination and technical knowledge are four factors that usually are exhibited by successful entrepreneurs. Family development and educational incubation are also examined. Is education important? Some argue that education and success as an entrepreneur are highly correlated, while others believe it inhibits the creative and challenging nature of entrepreneurship, that the best entrepreneurs actually drop out of school.52 Other authors, however, contend that new programs and educational developments are on the increase because they have been found to aid in entrepreneurial development.53 The family development idea focuses on the nurturing and support that exist within the home atmosphere of an entrepreneurial family. This reasoning promotes the belief that certain traits established and supported early in life will lead eventually to entrepreneurial success. (In Chapter 2, the concepts of entrepreneurial cognition and metacognition, which are beginning to take hold in the research on entrepreneurs, are discussed.)

18 Part 1: Entrepreneurship in the twenty-first century

SPENDING THE OLD MAN’S DOUGH Ivan is a successful first-generation Australian entrepreneur who emigrated from Russia. He started out as a mechanic in Melbourne and dreamed of building a better future for his new (Australian) children. Ivan was thrifty and disciplined. Although in a low-status occupation, he was very proud of how hard he worked. He took a few punts that paid off until he could open EDGE his own garage and he now runs a successful franchise business of several dozen oil and lube operations, where he trains other immigrants. Ivan is a classical entrepreneur, but how should he teach his children? Does he encourage them to follow his lead and create financial success as entrepreneurs? The chances are he won’t. Fewer than one in five do. Instead, Ivan wants his children to have a ‘better’ life. He encourages them to spend many years at university. He wants his children to become physicians, lawyers, accountants, executives and so on. But in encouraging them so, Ivan essentially discourages his children from becoming entrepreneurs. He unknowingly has them postpone their entry into the labour market until they have finished the finest education that Australia has to offer. And, of course, he encourages them to reject his lifestyle of thrift and the self-imposed environment of scarcity and instead to be consumers of material goods. Ivan defines ‘better’ as having better ‘stuff’: finer homes, new luxury cars, quality clothing and club memberships. What he doesn’t include are the elements that were the foundation stones of his own success: hard work, risk taking and perseverance. Ivan does not realise that being well educated has certain economic drawbacks. What Ivan’s well-educated children often learn by the time they are adults is to be the grand consumers of material goods. And at the same time they are also underperformers as entrepreneurs. They are the opposite of their father; the blue-collar, successful business owner. They are part of the high-consuming, self-employment-postponing generation, and what’s worse they still live at home enjoying the old man’s wealth!

ENTREPRENEURIAL

Questions 1 In your own experience, what are the social and cultural reasons that Ivan’s children are underachievers? 2 Do you know people who are like Ivan’s children? Are you like them? 3 What would you recommend ‘to kick some sense’ into their heads? 4 Is more schooling, or different schooling, the right answer?

• The venture opportunity school of thought: This school of thought focuses on the opportunity aspect of venture development. The search for idea sources, the development of concepts and the implementation of venture opportunities are the important interest areas for this school. Creativity and market awareness are viewed as essential. Additionally, according to this school of thought, developing the right idea at the right time for the right market niche is the key to entrepreneurial success.54 Another development from this school of thought – one that greatly influences how this book is put together – is the pathways principle. New pathways or opportunities will arise that lead entrepreneurs in different directions. The ability to recognise these opportunities when they arise and to implement the necessary steps for action is a key factor. Roman philosopher Seneca’s maxim that ‘Luck is what happens when preparation meets opportunity’ underlies this pathways principle. Proponents of this school of thought believe that proper preparation in the interdisciplinary business segments will enhance the ability to recognise venture opportunities. You will see that this book presents various pathways toward becoming an entrepreneur. • The strategic formulation school of thought: Strategic planning is inextricably interwoven into the entire fabric of management; it is not something separate and distinct from the process of management. The strategic formulation approach to entrepreneurial

Chapter 1: Entrepreneurship: evolution and revolution 19

theory emphasises the planning process in successful venture development.55 One way to view strategic formulation is as a leveraging of unique elements.56 Unique markets, unique people, unique products or unique resources are identified, used or constructed into effective venture formations. The interdisciplinary aspects of strategic adaptation become apparent in the characteristic elements listed here with their corresponding strategies. – Unique markets: Mountain versus mountain gap strategies, which refers to identifying major market segments as well as interstice (in-between) markets that arise from larger markets. – Unique people: Great chef strategies, which refers to the skills or special talents of one or more individuals around whom the venture is built. – Unique products: Better widget strategies, which refers to innovations that encompass new or existing markets. – Unique resources: Water well strategies, which refers to the ability to gather or harness special resources (land, labour, capital, raw materials) over the long term. Without question, the strategic planning school encompasses a breadth of managerial capability that requires an interdisciplinary approach.57

THE ENTREPRENEURIAL REVOLUTION: A GLOBAL PHENOMENON It is clear that we are experiencing an Entrepreneurial Revolution across the world. This revolution will continue to be as important (if not more!) to the twenty-first century as the Industrial Revolution was to the nineteenth and twentieth century. Let’s have a look at some of the main hallmarks of this global phenomenon. What contributions do entrepreneurs make to worldwide wellbeing? How does entrepreneurship relate to levels of global development? What is the impact of the nimblest firms, known as gazelles? What about differences in generations? And how does entrepreneurship fit into personal freedom and liberty?

OUR ENTREPRENEURIAL ECONOMY Entrepreneurship is the symbol of business tenacity and achievement. Entrepreneurs are the pioneers of today’s business successes. Their sense of opportunity, their drive to innovate and their capacity for accomplishment have become the standard by which free enterprise is now measured. This standard is taking hold within free and open economies throughout the world. Entrepreneurial companies make two indispensable contributions to the economy. First, they are an integral part of the renewal process that pervades and defines market economies. Entrepreneurial companies play a crucial role in the innovations that lead to technological change and productivity growth. In short, they are about change and competition because they change market structure. The economies of the Asia–Pacific region are dynamic entities always in the process of becoming. Entrepreneurial companies focus on prospects for the future not on the inheritance of the past. Second, entrepreneurial companies are the essential mechanism by which millions enter the economic and social mainstream of society. Small business entrepreneurs enable millions of people, including women, ethnic minorities, Indigenous peoples and immigrants, to find prosperity for themselves and their families. Another benefit is the way that entrepreneurship can also play a positive role in delivering health, education and welfare services efficiently. Social enterprises encourage the participation of stakeholders in the management and delivery of such services,

20 Part 1: Entrepreneurship in the twenty-first century

enhancing innovation and client orientation. Such an approach can supplement public resources and extend the range of services offered to consumers. As we can see, entrepreneurship is not just a developed-world phenomenon. The poor in the developing countries can and do get richer through enterprise. Former UN Secretary-General, Kofi Annan, has said ‘entrepreneurs have the power to create the greatest change for their own countries’.58 What about entrepreneurship and levels of development? The Global Entrepreneurship Monitor (GEM) report provides the results in its yearly survey on entrepreneurship across the world.59 GEM sees different qualities of entrepreneurship determined by the stage of economic development (see Table 1.3). Individuals in factor-driven economies expressed a more positive attitude towards entrepreneurial measures – such as perceived opportunities to start a venture and perceived capabilities to do it – in comparison to those in efficiency-driven and innovation-driven economies. The same holds for entrepreneurial intentions. But, fear of failure is the highest among individuals in innovation-driven economies. TABLE 1.3

STAGES OF ECONOMIC DEVELOPMENT AS THEY RELATE TO ENTREPRENEURSHIP

Stage one

Factor-driven economies compete based on their factor endowments, primarily unskilled labour and natural resources.

Factor-driven economies with high early-stage entrepreneurial activity are: Cameroon, Uganda, Botswana and Bolivia.

Stage two

Efficiency-driven economies develop more efficient production processes and increase product quality. They compete more on higher education and training, efficient goods markets, efficient labour markets, developed financial markets, the ability to harness the benefits of existing technologies and market size.

Efficiency-driven economies with high earlystage entrepreneurial activity are: Mexico, Ecuador, Peru, Chile and Thailand.

Stage three

Innovation-driven economies go beyond basic requirements or efficiency enhancers. At this stage, companies compete by producing new and different goods using the most sophisticated production processes and through innovation. The outcome of the model is national economic growth through, for example, job creation and technical innovation.

Innovation-driven economies with high earlystage entrepreneurial activity are: United States, Australia, Canada and Singapore.

Source: ‘Methodology: The 12 pillars of competitiveness’, World Economic Forum, Switzerland, 2015.

There are world region differences too. Individuals in African economies tend to report the highest perception of opportunities, perceived skills to act entrepreneurially and entrepreneurial intentions, accompanied with the lowest fear of failure. Low levels of entrepreneurial intentions are found in the ex-Socialist economies of Europe, while the highest levels correspond to African economies. Starting a venture is seen as a good career choice mostly in African economies, while individuals in the European Union show the lowest level in this regard. Entrepreneurs in African and North American economies share the value of high status to successful entrepreneurs, which indicates that there is an entrepreneurial culture in those economies. GEM’s most famous measure is total early-stage entrepreneurial activity (TEA) – the proportion of adults in the process of starting a venture and those running a new business less than 3½ years old.

Chapter 1: Entrepreneurship: evolution and revolution 21

As a percentage of the adult population (18–64 years old) this measure tends to be the highest among factor-driven economies, and declines in economies with higher GDP per capita. Motivational reasons (necessity-driven or improvement-driven opportunity) provide additional understanding of an economy’s entrepreneurial profile. High early-stage entrepreneurial activity in factor-driven and efficiency-driven economies is motivated more by necessity than in the innovation-driven and efficiency-driven economies, where opportunity is the primary motivation.60 Entrepreneurs will continue to be critical contributors to economic growth through their leadership, management, innovation, research and development effectiveness, job creation, competitiveness, productivity and formation of new industry.

THE IMPACT OF THE GAZELLES New and smaller firms create the most jobs. The vast majority of these job-creating companies are fast-growing businesses. David Birch of Cognetics, Inc., has named these firms gazelles. A gazelle, by Birch’s definition, is a business establishment with at least 20 per cent sales growth every year (for five years), starting with a base of at least $100 000. Despite the continual downsizing in major corporations during the 1990s the gazelles produced millions of jobs. Their extraordinary performance and contribution warrants recognition.61 Gazelles are leaders in innovation. New and smaller firms are responsible for a high proportion of the innovations right throughout the economy. However, there are a number of myths about gazelles: • Gazelles are the goal of all entrepreneurs. Creating a gazelle can be rewarding not only financially but professionally. Not all entrepreneurs are suited for the high-stress environment that running a gazelle provides. The more successful a firm becomes, the more society scrutinises the actions of the management. Once the world is watching, keeping a gazelle growing takes not only tenacity but composure under extreme pressure. • Gazelles receive venture capital. Although venture capital (VC) firms prefer to invest in gazelles, many gazelles have never received VC funding. Less than 2 per cent of these companies have received VC funding, even in boom times. • Gazelles were never mice. By definition, gazelles are companies created with the intent of high growth and wealth creation, whereas mice are companies created with the goal of merely generating income and no intention of growth. Companies can be gazelles at birth; however, many businesses become gazelles later in life. As many as 20 per cent of gazelles have been in operation for more than 30 years. • Gazelles are high tech. To be classified as a gazelle, a company must have grown sales by 20 per cent for at least a five-year period, which can include firms in any industry. This myth most likely stems from the high margins enjoyed by most technology-based companies; however, gazelles are commonly found in low-tech sectors. • Gazelles are global. The scope of a business has no role in its distinction as a gazelle, so even though some gazelles are operating on a global scale, it is not a necessary characteristic. Making the decision to expand overseas prematurely can just as quickly lead to the death of a business as it can lead to its success. How can you tell a gazelle when you see one? • Growth rate. They will definitely come from companies that have a growth rate higher than 25 per cent yearly. As they say, a rising tide floats all boats, and there will be many, many companies in the category.

22 Part 1: Entrepreneurship in the twenty-first century

• Scalability. If a company can scale, it means it can produce its products for ever-increasing margins (that is, the 1000th widget costs less to make than the 10th). • Competitive advantage. The company will have ‘unfair’ competitive advantage and will own its own proprietary intellectual property (that is, patents). It will be able to stop other entrants from feasting on the buffet. Gazelles will be able easily to differentiate their offerings to their competitors. • Look for the 10x rule. The gazelle has to offer a solution that is 10x faster, 10x better, 10x more secure, 10x cheaper, etc.62

GENERATIONS OF ENTREPRENEURS On CourseMate Express read about boom time in entrepreneur-land. Unleashing the entrepreneurship potential of humanity.

There are some quite distinct entrepreneurial differences in the generations. The broadest study of this kind studied ‘Multi-Generational Worker Attitudes’ in the United States to understand how different generations view entrepreneurship.63 We have often heard that Generation Y is the most entrepreneurial generation. But this research found that 41 per cent of Generation X and 45 per cent of baby boomers considered themselves to be more entrepreneurial, compared to only 32 per cent of Gen Y. Gen Ys are also less risk averse relative to older generations. Baby boomers have the most amount of wealth, connections and business experience, all of which are needed to make a business successful. Soon Generation Z, those born 1995–2009, who never knew the pre-Internet world, will be graduating from school and universities and entering the workforce. They will be followed by Generation Alpha, those born after 2010. For this generation, smartphones have always existed. In 2015, Australian children were spending, on average, almost an entire day of the week on their smartphones.64 It has been predicted they will be the most formally educated generation in history, beginning school earlier and studying longer. The children of older, wealthier parents with fewer siblings, they are already being labelled materialistic.65

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The book you are holding is all about finding your own personal pathway to entrepreneurship. How can you become the ‘proprietor of the rest of your life’? How will you progress throughout your life? Are you a corporate entrepreneur or family business person? Will you start out as a bootstrapper or mini-entrepreneur? Will you acquire an existing business or move into franchising? Or is social venturing your pathway to entrepreneurship? Are you a lifestyle entrepreneur or a high-tech, highgrowth, self-maximising pioneer entrepreneur and inventor? This is all about your personal attitude towards life. Entrepreneurship, or the enterprising spirit, is actually central to our very concept of freedom. Amartya Sen, winner of the 1998 Nobel Prize in Economics, argues that economic activity is the objective and the primary means of enhancing human freedom: ‘The usefulness of wealth lies in the things that it allows us to do – the substantive freedoms it helps us to achieve’.66 For Sen, the highest expression of freedom is the ability to choose what kind of life one wants to lead, to be the sole proprietor of one’s own destiny. Individuals must be free to choose their own accounts of the good life. That freedom resides in such things as the right to participate in market exchange itself.67 If economic development is freedom, then so too is entrepreneurship. Indeed, to conceive an idea, to give that idea life by making it into an enterprise, and then to have that enterprise yield benefit for oneself and others is a distinctive type of freedom. Entrepreneurship is a mode of self-actualisation. As President Obama once said, ‘Entrepreneurship offers a positive alternative to the ideologies of violence and division that can all too often fill the void when young people don’t see a future for themselves’.68

Chapter 1: Entrepreneurship: evolution and revolution 23

Gen Y, Gen X and baby boomers

FIGURE 1.5 GENERATIONS OF ENTREPRENEURS, HOW DO THEY COMPARE?

Meet the multigenerational workforce Gen-Y

Gen-X

Born between late 1980s–early 2000s. Also called millennials.

Born between late 1960s–early 1980s.

Baby Boomers

Born between 1946–1964.

Do you consider yourself an entrepreneur? 50% 41

45

32 25%

32% of Gen-Yers consider themselves entrepreneurs.

41% of Gen-Xers consider themselves entrepreneurs.

45% of Boomers consider themselves entrepreneurs.

Source: Based on image by Faramarz Hashemi, ‘Are baby boomers more entrepreneurial than Gen Y?’ by Charlie Osborne, ZDNet.com. Published by CBS Interactive, ª 2013.

The father of modern entrepreneurial science, Austrian economist Joseph Schumpeter, once commented that motivations to become an entrepreneur could also be duty to oneself: the dream and will to found a private kingdom; … the will to conquer; the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself; … the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity … 69

These are men and women who control their own destiny, who do not want to be a wage-slave to another, and are called sovereign individuals. This notion is central to classical liberalism and individualistic political philosophies. As John Locke wrote in his Two Treatises on Government, ‘every man has a Property in his own Person’. The individual ‘has a right to decide what would become of himself and what he would do, and as having a right to reap the benefits of what he did’.70

24 Part 1: Entrepreneurship in the twenty-first century

Top Gen Y female entrepreneur tells why she succeeded in Malaysia on CourseMate Express.

This trend towards self-proprietorship and self-employment is impressive. While we do not have comparable figures for the Asia–Pacific countries, in the US accurate figures of self-employment among the various job categories have been kept.71 Table 1.4 shows the percentage of selfemployment of some new-millennium professions. Writers, photographers and multimedia specialists, for example, are remarkably high in self-employment rates. From farmers and psychologists to optometrists and fashion designers, many of today’s professions are highly self-employed. We noted earlier that this book was not about small business managers or management but rather innovation and growth, so why are we referring to self-employment options? As you will encounter in Chapter 2 when we discuss pathways to entrepreneurship, preparatory experiences are part of the life cycle of an entrepreneur. Experiencing business, no matter what its form, is part of learning the tools of the trade. We trust that some small self-employment ventures will push through the growth barrier while for others they will be a stepping stone to something more ambitious. Others may find that ‘small is all’ and that the experience leaves them with no desire to manage a larger venture. Yet still others may find that entrepreneurship specifically and business generally is not for them. It is also expected that some will have a desire to work with or to support entrepreneurial companies in consultancy, technology commercialisation, financing, regional development and policy areas. There is more to entrepreneurship and innovation than being the high-flying, riskdefying entrepreneur. TABLE 1.4

MODERN PROFESSIONS, PERCENTAGE OF SELF-EMPLOYED (OVER 20 PER CENT)

Farmers and agricultural managers

73

Interior designers

26

Writers and authors

67

Animal carers

25

Photographers

60

Fashion designers

25

Construction managers

57

Optometrists

25

Fishers and fishing vessel operators

57

Film and video editors and camera operators

24

Multimedia artists and animators

57

Lawyers

22

Real estate brokers

52

Advertising managers

22

Artists

50

Management analysts

21

Property and real estate

50

Actors, producers and directors

21

Food service managers

40

Architects

21

Musicians and singers

36

Landscape architects

21

Jewellers and precious stone and metal workers

33

Private detectives and investigators

21

Psychologists

33

Financial advisers

20

Appraisers and assessors of real estate

27

Interpreters and translators

20

Source: Bureau of Labor Statistics and US Department of Labor, ‘Occupational Outlook Handbook 2014-15 Edition’, http://www.bls.gov/oco

Chapter 1: Entrepreneurship: evolution and revolution 25

Consider Figure 1.6. Where do you see your own personal life going? Remember, you are not alone. In the last decade of the twentieth century and into the new millennium, various pressures have been driving the acceleration of the entrepreneurial society.72 This includes the liberal revolution in deregulation and privatisation, the creation of new markets for public services and the need for market mechanisms in environmental protection. The high rate of technological change coupled with the increasingly differentiated and highly segmented markets for products and services have opened the way for new types of social and business enterprises to fill these gaps. FIGURE 1.6 THE CIRCLE OF LIFE: WHICH WAY FOR YOU?

Practical experience University

Management training High-growth firm Start-up venture Another start-up

Corporation

Another start-up Venture capitalist Angel investor Retire early

Social entrepreneur

Never really retire

At the personal level, the loss of ‘lifetime employment’ and downsizing of companies, the decline in retirement benefits as a result of the Global Financial Crisis (GFC) together with early retirement, greater social mobility, as well as higher divorce rates and single parent families, have created a new cohort of individuals who, whether through necessity or opportunity, are starting new ventures at an unprecedented rate.

IS YOUR UNIVERSITY ENTREPRENEURIAL? Entrepreneurship is a significant driver of improvements in social welfare and economic prosperity. ‘A mountain of empirical evidence’ points to the ‘positive and statistically robust link between entrepreneurship and economic growth’ across a broad spectrum of performance measures.73 By some counts, 80 per cent of leading new industries derive their knowledge base from university-based research.74 Hopefully, you find yourself in an entrepreneurship university. One way to answer this question is to consider whether you find yourself in what Fetters called the university-based entrepreneurship ecosystem (U-BEE).75 The entrepreneurial ecosystem comprises the physical spaces where entrepreneurs interact; the alignment of institutional objectives; access to university resources like laboratories, researchers and knowledge transfer; market-driven orientation for research; participation of the business community; participation of venture capital firms; active participation of state and federal governments in creating the necessary legal framework and assigning economic resources to job and new venture creation; and many other things (see Table 1.5). Education should really accelerate one’s self-efficacy. Self-efficacy is an important trait that enables a person to have confidence in discovering opportunities and when contemplating the feasibility of starting a business. Don’t forget that self-efficacy is stimulated not only through education but also through an individual’s family, peers and society. Some of the most famous

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26 Part 1: Entrepreneurship in the twenty-first century

TABLE 1.5

COMPONENTS OF A UNIVERSITY-BASED ENTREPRENEURSHIP ECOSYSTEM

Ongoing curriculum innovation Networking events for entrepreneurs At least one subject in entrepreneurship Links to angel and venture funds Business plan competitions Entrepreneurship student club(s) Entrepreneurship concentration or minor Entrepreneurship courses for non-business majors Business incubator Senior leadership support for entrepreneurship strategy Strategic vision statement on entrepreneurship Work integrated learning for entrepreneurs Entrepreneurship activities centre Entrepreneurship research activities Entrepreneurship academic division Student venture investment fund Entrepreneurship endowed chair

Go online to see a list of the best business schools for entrepreneurship in the Asia-Pacific

entrepreneurs did not complete college. Thomas Edison finished school at 12, Steve Woznick and Steve Jobs did not graduate and Bill Gates dropped out of Harvard to start Microsoft, while Michael Dell quit the University of Texas to start Dell Computers. Your entrepreneurship education will have a grand effect on you. Babson College research shows that taking two or more core entrepreneurship elective courses positively influenced the intention to become an entrepreneur both at the time of graduation and long afterward.76 University of Arizona research has found that entrepreneurship students are three times more likely to be selfemployed. They are more likely to be employed full time and less likely to work for government or non-profit entities. They also have annual incomes that are 27 per cent higher and own 62 per cent more assets than other graduates.77 At Monterrey (Mexico) Institute of Technology, 35 per cent of students enrolled in ‘Entrepreneurial Leadership’ had established a business within five years and 68 per cent of alumni had owned a business within 25 years.78 At the National University of Singapore, entrepreneurship graduates have three times the propensity to start their own business or to be employed in small start-up companies, compared to their peers.79 At the University of Southern California, from 1971–2000 an average of 37 per cent of students launched businesses by the time they graduated.80 The most comprehensive study of entrepreneurship education, encompassing 38 countries, shows that entrepreneurs are more likely to have received training in starting a business (33 per cent) than the rest of the working-age population (20 per cent).81 Gibb and Hannon found that ‘appropriate entrepreneurship programmes in the university context do impact upon the aspiration to self-employment and business creation’.82

Chapter 1: Entrepreneurship: evolution and revolution 27

SUMMARY Chapter 1 examined the evolution of entrepreneurship and provided a foundation for further study of this dynamic and developing discipline. We began by examining the global imperatives surrounding climate change and its effect on entrepreneurs, which will be the subject dealt with more deeply in Chapter 3. In particular, we mentioned the existential risks that affect the future careers of entrepreneurs. We differentiated entrepreneurs into two groups, social and business; and we distinguished these two types of entrepreneurs from small business owners. We presented a glimpse of the entrepreneurial mind, which will be covered further in Chapter 2. We explored the early economic definitions of entrepreneurship, as well as select contemporary ones. This chapter presented a historical picture of how entrepreneurship has evolved over the centuries. Research in our fields has identified seven schools of thought that help organise how we think about entrepreneurship. They are divided into macro and micro approaches. We also examined the various generations of entrepreneurs and discussed entrepreneurship as a pathway to human freedom. Finally, we looked at the role of universities in entrepreneurship education.

KEY TERMS AND CONCEPTS achievement anthropogenic Asia–Pacific baby boomers bear market better widget strategies business entrepreneurs capitalism carbon emissions classical liberalism climate change copreneur displacement school of thought ecological school of entrepreneurial thought economic growth enterprise entreprendre entrepreneur entrepreneurial entrepreneurial mind-set Entrepreneurial Revolution entrepreneurial trait school of thought entrepreneurship entrepreneurship education existential risks external locus of control financial/capital school of thought

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free enterprise gazelles Generation Alpha Generation X Generation Y Generation Z Global Entrepreneurship Monitor (GEM) great chef strategies greenhouse gases human freedom individualism Industrial Revolution interdisciplinary Intergovernmental Panel on Climate Change (IPCC) internal locus of control job creation Joseph Schumpeter macro view of entrepreneurship micro view of entrepreneurship mountain gap strategies niche advantage pathways principle Richard Cantillon rugged individualists school of thought self-efficacy self-employment

Review key terms with interactive flashcards

self-proprietorship seniorpreneur sequester small-business owners social and cultural school of thought social discount rate social entrepreneurs sole proprietor of the rest of their life sovereign individual start-up strategic formulation school of thought sustainability theory traits undertaker university-based entrepreneurship ecosystem (U-BEE) usury venture opportunity school of thought water well strategies

28 Part 1: Entrepreneurship in the twenty-first century

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

What is the potential role for entrepreneurs in the era of climate change? What is the difference between social entrepreneurs and business entrepreneurs? What is the difference between entrepreneurs and small-business managers? Briefly describe what is meant by the term ‘entrepreneurship’. Why do we use the French word instead of an English equivalent? Is there a distinction between ‘enterprising’ and ‘entrepreneurial’ in your language? If so, what is it? How were entrepreneurs historically viewed? What challenges did they face throughout history? In your culture, what is the history of enterprise and entrepreneurship? When was the word ‘entrepreneur’ first used in economic literature? Which school of entrepreneurial thought makes most sense to you, and why? What are the generational differences in entrepreneurial activity? Is entrepreneurship really another word for ‘human freedom’? What are the professions that have the highest proportion of self-employed people? Is your personal entrepreneurship education curriculum relevant to you? What personal gain do you expect out of your entrepreneurship education? Are you in an entrepreneurial university?

EXPERIENCING ENTREPRENEURSHIP Finding your own personal entrepreneurial ecosystem Just as an ecosystem in the physical environment is a balanced, interdependent quasi-stable community of organisms living together, so its industrial analogue is the business ecosystem, which is a ‘balanced, quasi-stable collection of interdependent firms belonging to the same economy’.83 We can refer to geographical environments that influence you in supporting your quest for entrepreneurship.84 According to Isenberg, entrepreneurs are most successful when they have access to the human, financial and professional resources they need, and operate in an environment in which policies encourage and safeguard entrepreneurs. This network is described as the ‘entrepreneurship ecosystem’.85 Aulet describes the relevant components of a successful innovation ecosystem as individuals, organisations and resources; specifically including government, demand, invention, funding, infrastructure, entrepreneurs and culture.86 Here are some ways to be sure your own personal entrepreneurship ecosystem is in place. 1 Within your own culture, find those success stories and role models who tolerate honest mistakes, take honourable failure in their stride, permit risk taking and cultivate contrarian thinking. Who is it within your own personal circle who respects entrepreneurship as a worthy occupation? 2 Identify knowledgeable people who have experience in creating organisations, hiring, and building structures, systems and controls. 3 Find the mentoring organisations and industry associations that help investors and entrepreneurs network and learn from one another. 4 Locate the educational institutions (or even online tutorials) that teach financial literacy and entrepreneurship. 5 Pay attention to the public infrastructure you will be needing, such as transportation (roads, airports, railways, container shipping) and communication (digital, broadband, mobile). 6 Think about relocating yourself to a geographic location that has a concentration of people who think like you do. This might be close to universities, training institutions, suppliers, consulting companies and professional associations. 7 Subscribe to, or become a member of, formal or informal groups that link entrepreneurs in the country or region and diaspora networks – in particular, high-achieving expatriates.

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Chapter 1: Entrepreneurship: evolution and revolution 29

8 9

Always be on the lookout for fellow travellers who, like you, are pursuing venture-oriented professions, such as lawyers, accountants and market and technical consultants. Stay in touch with your potential customers who are willing to give advice, particularly on new products or services.87

EXPERIENCING ENTREPRENEURSHIP Understanding your beliefs about successful entrepreneurs Read each of the following 10 statements and indicate your agreement or disagreement. If you fully agree with the statement, score 10. If you totally disagree, score 1. If you tend to agree more Experience this activity than you disagree, give a response between 6 and 9 depending on how much you agree. If you online tend to disagree, give a response between 2 and 5. 1 Successful entrepreneurs are often methodical and analytical individuals who carefully plan out what they are going to do and then do it. 2 The most successful entrepreneurs are born with special characteristics, such as a high achievement drive and a winning personality and these traits serve them well in their entrepreneurial endeavours. 3 Many of the characteristics needed for successful entrepreneurship can be learned through study and experience. 4 The most successful entrepreneurs are those who invent a unique product or service. 5 Highly successful entrepreneurs tend to have very little formal schooling. 6 Most successful entrepreneurs admit that dropping out of school was the best thing they ever did. 7 Because they are unique and individualistic in their approach to business, most successful entrepreneurs find it hard to socialise with others; they just do not fit in. 8 Research shows that although it is important to have adequate financing before beginning an entrepreneurial venture, it is often more important to have managerial competence and proper planning. 9 Successful entrepreneurship is more a matter of preparation and desire than luck. 10 Most successful entrepreneurs do well in their first venture, which encourages them to continue; failures tend to come later on as the enterprise grows. Put your answers in the table below in this way: • enter answers to numbers 1, 3, 8 and 9 just as they appear • then subtract the answers to 2, 4, 5, 6, 7 and 10 from 11 before entering them here. Therefore, if you gave an answer of 8 to number 1, put an 8 before number 1 here. However, if you gave an answer of 7 to number 2, place a 4 before number 2 here. Then add both columns of answers and enter your total in the space provided.

Scoring block AS THEY APPEAR

SUBTRACT FROM 11

1

2

3

4

8

6

9

7 5 10 Total of both columns

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30 Part 1: Entrepreneurship in the twenty-first century

Interpretation This exercise measures how much you believe the myths of entrepreneurship. The lower your total, the stronger your beliefs; the higher your total, the less strong your beliefs. Numbers 1, 3, 8 and 9 are accurate statements; numbers 2, 4, 5, 6, 7 and 10 are inaccurate statements. Here is the scoring key: • 80–100 – excellent; you know the facts about entrepreneurs. • 61–79 – good, but you still believe in a couple of myths. • 41–60 – fair; you need to review the chapter material on the myths of entrepreneurship. • 0–40 – poor; you need to reread the chapter material on the myths of entrepreneurship and study these findings.

EXPERIENCING ENTREPRENEURSHIP Are you a high achiever? One of the most important characteristics of a successful entrepreneur is the desire to be a high achiever. The following 10 questions are designed to help identify your achievement drive. Select Experience this activity the letter that best matches your answer and write it down. Scoring information is provided online below. 1 An instructor in one of your classes has asked you to vote on three grading options. Which of these options would you choose? a Study the course material, take the exams and receive the grade I earn b Roll a dice and get an A if I roll an odd number and a D if I roll an even number c Show up for all class lectures, turn in a short term paper and get a C 2 How would you describe yourself as a risk taker? a High b Moderate c Low 3 You have just been asked by your boss to take on a new project in addition to the many tasks you are already doing. What would you tell your boss? a Since I’m already snowed under, I can’t handle any more b Sure, I’m happy to help out; give it to me c Let me look over my current workload and get back to you tomorrow about whether I can take on any more work 4 Which one of these people would you most like to be? a Steve Jobs, founder of Apple Computers b Donald Trump of Apprentice television show fame c Richard Branson, Virgin Airlines 5 Which one of these games would you most like to play? a Monopoly b Bingo c Roulette 6 You have decided to become more physically active. Which one of these approaches has the greatest attraction for you? a Join a neighbourhood sports team b Work out on my own c Join a local health club 7 With which one of these groups would you most enjoy playing poker? a Friends b High-stake players c Individuals who can challenge me

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Chapter 1: Entrepreneurship: evolution and revolution 31

8

Which one of these persons would you most like to be? a A detective solving a crime b A politician giving a victory statement c A millionaire sailing on their yacht 9 Which one of these activities would you prefer to do on an evening off? a Visit a friend b Work on a hobby c Watch television 10 Which one of these occupations has the greatest career appeal for you? a Computer salesperson b Corporate accountant c Criminal lawyer

Scoring Transfer each of your answers to the following scoring key by circling the appropriate number (e.g. if your answer to question 1 is c, you will circle the number 2 in row 1). Then total all three columns to arrive at your final score. a

b

c

High achievers

76–100

1.

10

0

2

Moderate achievers

50–75

2.

2

10

2

Low achievers

<50

3.

6

2

10

4.

7

10

5

5.

10

0

0

6.

2

10

6

7.

4

2

10

8.

10

7

4

9.

4

10

4

10.

10

5

10

Interpretation of each question 1

2 3 4 5 6

7

High achievers take personal responsibility for their actions. They do not like to rely on luck. The third option (c) assumes the class time saved by not having to study for exams will be used to study for other classes; otherwise the answer would be a zero. High achievers are moderate risk takers in important situations. High achievers like to study a situation before committing themselves to a course of action. Jobs was a high-achieving individual but was more interested in design and engineering than in goal accomplishment. Trump is an extremely high-achieving salesperson/executive. Monopoly allows the high achiever to use their skills. Bingo and roulette depend on luck. The high achiever would work out on their own. The second-best choice is to join a health club, which allows less individual freedom but gives the chance to get feedback and guidance from individuals who understand how to work out effectively. High achievers like challenges but not high risks. If you are a very good poker player and you chose (b), you then can raise your score on this question from 2 to 10.

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32 Part 1: Entrepreneurship in the twenty-first century

8

Because high achievers like to accomplish goals, the detective would have the greatest appeal for them. The politician is more interested in power and the millionaire is simply enjoying life. 9 High achievers like to do constructive things that help them improve themselves, so working on a hobby would be their first choice. 10 The computer salesperson and the criminal lawyer have a much higher need to achieve than does the corporate accountant.

CASE STUDIES CASE 1.1 Gazelle . . . or turtle? Summit Software, Inc., recently celebrated its fifth year of business. Jim Mueller, the proprietor, started the software manufacturing and distribution company when he was still working as a professor at the local university, but now he enjoys being in the fast-paced technology industry. Growth and expansion were easy for Jim, thanks to his knowledge, his contacts and the pool of readily available workers from which to choose. The company that originated in his study now occupies a nice space close to the city centre. Going into the sixth year, Jim continues to serve the same target market with customer support and lengthy projects. He acknowledges that technological advancements and new clientele are in the immediate future. All of the current and forecasted work leaves Jim and his three employees with little time to spend on administrative duties – let alone new accounts. Jim also realises that the company needs its own upgrades to continue its rate of success and to stay competitive. Looking at Summit’s financials and the amount of work necessary to maintain the business, he’s not sure where to go from here. Following is a snapshot of Jim’s annual sales since inception: Year 1

$112 000

Year 2

$195 000

Year 3

$250 000

Year 4

$335 000

Year 5

$487 000

QUESTIONS

1 2 3

Is Summit Software a gazelle? Support your answer. What problems may Jim face by owning such a fast-growing business? Are gazelles more important to the economy than traditional growth businesses? Why or why not?

CASE 1.2 Paul Cave ‘Our job is to enable our customers to make heroes of themselves.’ Using creative thought and determination, Paul Cave, founder and chairman of BridgeClimb, has created a $50 million business in just a few years, effectively monopolising an internationally famous Australian icon brand he doesn’t own, capitalising on huge advertising he doesn’t pay for and sending a personally delivered word-of-mouth recommendation through one million customer heroes to arguably 100 million prospects around the world. And this is just the beginning. Paul Cave made no fewer than 52 presentations in the late 1990s in an attempt to raise $12 million to fund a business that would enable millions of people to climb the Sydney Harbour Bridge. The predominantly merchant banking targets thought it was a fascinating opportunity, but not for their money. In the end, it was another entrepreneur, Brett Blundy,

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Chapter 1: Entrepreneurship: evolution and revolution 33

who Cave says ‘put money into this within 60 seconds of my telling him about it and became my first major shareholder’. Analytical minds struggle when there is no precedent to rely upon. Clearly Blundy, like Cave, was searching for opportunities where there was no precedent. Just three years after BridgeClimb opened, the business was climbing 300 000 people per annum (two-thirds of them international visitors) and achieving a turnover of $50 million; and now more than 2.5 million people have since climbed. Cave talks privately of a bottom line that would make Warren Buffett green with envy. Since commencement, the company has distributed over one million dollars in special thank-you bonuses to its 280 staff. Cave isn’t really surprised at the success of BridgeClimb. Since he first conceived the idea over a decade ago while on a bridge climb with his YPO (Young Presidents Organisation) forum, he was forced to take plenty of time to think the concept through. ‘As an entrepreneur, you couldn’t have found anything [the barriers] more frustrating. The first letter from the government basically gave 64 reasons why not’, he says. Having been on the receiving end of so many ‘No’ answers has made Cave decidedly a ‘Yes’ man. Having now made it possible for blind and deaf people to make the climb, the next challenge to be overcome is to climb people in wheelchairs and he is confident of success. Fortunately, Paul Cave’s analytical economics background has not masked his creative marketing ability – not only to sense a basic business opportunity that has been staring Australians in the face since 1932, but also to see beyond the simple climb to the higher order monopolisable value that is already generating extraordinary wealth for the company. BridgeClimb projects that it will pay an estimated $130 million to the Roads and Traffic Authority of New South Wales over 20 years for exclusive tourism rights to arguably Australia’s most internationally recognised manmade icon. This cost pales into insignificance when one considers the real value of the asset ‘leased’. While the Sydney Harbour Bridge itself is perhaps worth a billion dollars as a structure, its value as an established international brand and icon is far greater, probably in the order of tens of billions. The brand is being built further and maintained by word of mouth and advertising in an extraordinary manner. Being a world-first bridge-climbing experience gives a powerful first-mover advantage. But being on an already world-famous bridge in the centre of Australia’s largest and most visited tourist city is another monopoly. But that’s by no means all. Cave says: ‘The Australian Tourist Commission has spent some $20 to $30 million showing commercials featuring BridgeClimb to the rest of the world to bring people here. ‘Eleven hundred journalists climbed the bridge during the 2000 Olympic Games and the publicity they generated could have reached an estimated 2.5 billion people worldwide. That advertising and publicity has come to us at no cost.’ The way Cave has harnessed more than a million climbers as compelling promoters of his company’s message further exemplifies the man’s intuitive ability to market without money through customer word of mouth. The value delivery system – company culture, defined procedure, staff training, climber preparation, climber satisfaction measure and so on – is designed, as Cave puts it, to delight the customer, ‘every climber, every time and there is no exception to that’. Climbing, now permitted 24 hours a day, seven days a week, happens as often as every 10 minutes whether it is hot, cold, raining or foggy and the customer ratings (excellent plus good) average more than 99 per cent in all conditions. Price is not an issue, but providing extraordinary value is, Cave insists. The average price per person is $145 and a further $30 is spent on merchandise. He admits that the value people ascribe to the ‘Climb of Your Life’ experience is a voyage of discovery for him. Once discovered, however, his mind pursued the value like a dog with a bone. For example, 400 (known) proposals of marriage have been made on BridgeClimb, with only one rejection. A technique has been devised so that the ring can be passed safely and securely down a piece of cord to seal the acceptance. Integrated value indeed! The advice that Paul Cave offers budding entrepreneurs is deceptively simple when one considers the lengths to which he has gone to implement his formula. Be clear about what it is and don’t stray from that course. Keep driving in pursuit of that goal. He admits that BridgeClimb operating on the Sydney Harbour Bridge is ‘a dream come true’ and his international team is working on other icon bridges around the world. Don’t try to be all things. Be famous for just one thing, says Cave: ‘We are doing a very simple thing. We are a facilitator only, taking people to the top of the bridge. Our job is to enable our customers to make heroes of themselves. If prospective staff find that unreasonable (that is, the every climber, every time, constant measurement philosophy), please don’t come here’, Cave says. Source: John Lyons & Edward de Bono (2003). ‘Marketing without money’, published by Pennon Publishing. Copyright ª 2003 by John Lyons. Used by permission.

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34 Part 1: Entrepreneurship in the twenty-first century

QUESTIONS

1 2 3

What was the opportunity that Cave saw that allowed him to market someone else’s product without any money? Cave gives meaning to the I Ching’s hexagram ‘in adversity, it furthers one to be persevering’. Give your own interpretation of this. What does Cave mean when he discusses enabling the customers to become heroes? What entrepreneurial traits did Cave exhibit in starting this business?

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! subject is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! subject database via http:// login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. anthropogenic carbon emissions gazelles Generation Y 1 2

3

self-employment seniorpreneur sustainability

Look at the discussion of the keyword ‘anthropogenic’ in ‘Letters to the editor’ in The Australian newspaper. Australians are sometimes called the greatest climate change deniers in the world. Would you agree based upon this analysis? What do we mean by Generation Y’s entitlement? What are the differences with the baby boomers? How might this affect Gen Y’s entrepreneurship activities? See Christopher S. Alexander and James M. Sysko, ‘I’m Gen Y, I love feeling entitled, and it shows’, Academy of Educational Leadership Journal, 17(4) (Oct. 2013), p. 127. Try using the topic finder. Search for example: (1) Document Title (self-employment) And Document Title (immigrants); Document Title (self-employment) And Document Title (ethnic). And then click on Topic Finder. What do you see?

ENDNOTES 1 Cited in ‘On the brink of abrupt climate change’, http://www.icemon.org/on-thebrink-of-abrupt-climate-change.html. 2 Drucker, P. F. (1985). Innovation and entrepreneurship. UK: Butterworth & Heinemann. 3 Winike, J. (1973). Carl Miler, The Man Who Staked His Life On A Roller Coaster, Northwest Magazine. 4 The IPCC published its Fifth Assessment Report (AR5) in 2014,

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http://www.ipcc.ch/report/ar5/index. shtml Helpful materials include: Henson, R. (2011). 5 Geiling, N. (2014). Five conflicts and collapses that may have been spurred by climate change. Smithsonian Magazine, 20 October, http://www.smithsonianmag.com/ history/climate-wars-conflicts-collapsesspurred-climate-change-180952862; Center for Climate & Security, Two new studies on Syria, drought, climate change, natural

resource management and the uprising, http://climateandsecurity.org/2014/03/26/ review-two-new-studies-on-syria-droughtclimate-change-natural-resourcemanagement-and-the-uprising. 6 Bostrom, N. (2013). Existential risk prevention as global priority. Global Policy, 4(1), 15–31. 7 UK Treasury, Stern Review on the Economics of Climate Change, Chapter 2, Technical annex: Ethical frameworks and

Chapter 1: Entrepreneurship: evolution and revolution 35

inter-temporal equity, Table 2A.1, Column 5. Note: This text does discuss nuclear war and asteroids too, http:// web.archive.org/web/20081211182219/ http://www.hm-treasury.gov.uk/ stern_review_final_report.htm. 8 You can check the daily levels at Mauna Loa Observatory: NOAA-ESRL, Earth’s CO2 Home Page, http://co2now.org. 9 For more information, see ‘4 degrees or more?: Australia in a hot world’ (conference), http://www.fourdegrees2011.com.au. 10 Global Carbon Project, Global carbon budget, http://www.globalcarbonproject. org/carbonbudget/14/data.htm. To change metric tonnes to carbon tonnes of CO2 per year, multiply the values below by 3.664. 1MtC ¼ 1 million tonnes of carbon ¼ 3.664 million tonnes of CO2. 11 US Department of Energy, Greenhouse Gas Equivalencies Calculator, http:// www.epa.gov/cleanenergy/energyresources/calculator.html. 12 Union of Concerned Scientists, Tropical deforestation and global warming: A solution, http:// www.ucsusa.org/global_warming/solutions/ stop-deforestation/tropical-deforestationand-1.html#.VNbToS7QNv8. 13 National Council for Science and the Environment (2010). The climate solutions consensus: What we know and what to do about it (Blockstein, D. E. & Wiegman, L., eds). Washington: Island Press, 101. 14 Wall, T. (2013). 9 popular cities losing war with rising seas, 2 July, http:// news.discovery.com/earth/globalwarming/cities-battling-sea-level-rise130701.htm. 15 Regional effects of global warming, http://en.wikipedia.org/wiki/ Regional_effects_of_global_warming. 16 Schramm, C. J. (2010). Expeditionary economics. Foreign Affairs, 89(3), 92. 17 Hunter, M. (2011). Opportunity, strategy and entrepreneurship: Volume 1: Introduction, the nature of opportunity, time and space, the vision platform, and making connections. Hauppauge, NY: Nova Publishers, Chapter 2. 18 Wright, M. (2009). We have to start thinking out of the box. Financial Times, 14 January 2009, http://www.ft.com/intl/ cms/s/0/b1ce92c4-e261-11dd-b1dd0000779fd2ac.html#axzz3RtRNBWVu. 19 D’Andrea Tyson, L. (2004). Good works – with a business plan. Business Week, 3 May. 20 Bridge, S., O’Neill, K. & Cromie, S. (1998). Understanding enterprise, entrepreneurship & small business. London: Macmillan, 21. 21 For a compilation of definitions, see Ronstadt, R. C. (1984). Entrepreneurship.

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Dover, MA: Lord Publishing, 28; Stevenson, H. H. & Gumpert, D. E. (1985). The heart of entrepreneurship. Harvard Business Review, March/April, 85–94; Barton Cunningham, J. & Lischeron, J. (1991). Defining entrepreneurship. Journal of Small Business Management, January, 45–61; Audretsch, D. B. (2003). Entrepreneurship: A survey of the literature. Luxembourg: Office for Official Publications of the European Communities; Berglann, H., Moen, E. R., Røed, K. & Skogstrøm, J. F. (2011). Entrepreneurship: Origins and returns. Labour Economics, 18(2), 180–93; McMullan, W. E. & Kenworthy, T. P. (2015). Modernizing Schumpeter: Toward a new general theory of entrepreneurship. In Creativity and Entrepreneurial Performance. Springer International Publishing, 57–72. 22 Craig, R. D. (2004). Handbook of Polynesian mythology. ABC-CLIO, 168. 23 See Dana, L. P. (2011). World encyclopedia of entrepreneurship. Cheltenham, UK; Northampton, MA: Edward Elgar; Kent, C. A., Sexton, D. L. & Vesper, K. H. (1982). Encyclopedia of entrepreneurship. Englewood Cliffs, NJ: Prentice-Hall; Montagno, R. V. & Kuratko, D. F. (1986). Perception of entrepreneurial success characteristics. American Journal of Small Business, Winter, 25–32; Begley, T. M. & Boyd, D. P. (1987). Psychological characteristics associated with performance in entrepreneurial firms and smaller businesses. Journal of Business Venturing, Winter, 79–91; Kuratko, D. F. (2002). Entrepreneurship. International encyclopedia of business and management (2nd ed.). London: Routledge Publishers, 168–76. 24 Crush, J. and Ramachandran, S., ‘Migrant entrepreneurship collective violence and xenophobia in South Africa’, Migration Policy Series No. 67 (Capetown: Southern African Migration Programme & International Migration Research Centre, 2014). http://imrc.ca/ wp-content/uploads/2015/01/MigrantEnterpreneurship-Collective-Violenceand-Xenophobia-in-South-Africa.pdf. 25 Moore, K. & Lewis, D. (1999). Birth of the multinational: 2000 years of ancient business history. Copenhagen: Copenhagen Business School Press. 26 Luckenbill, D. (1926). Ancient records of Assyria and Babylonia: Historical records of Assyria. Chicago: University of Chicago Press. 27 Wingham, D. W. (2004). Entrepreneurship through the ages. In Harold P. Welsch (ed.), Entrepreneurship: The way ahead. New York: Routledge, 27–42.

28 Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893–921. 29 Finley, M. I. (1965). Technical innovation and economic progress in the ancient world. Economic History Review, 18, August, 29–45, cited in Baumol (1990). 30 Finley, M. I. Technical innovation, cited in Baumol (1990), 32. 31 Adas, E. B. (2006). The making of entrepreneurial Islam and the Islamic spirit of capitalism 1. Journal for Cultural Research, 10(2), April, 113–37. 32 Favier, J. (trans. by Caroline Higgitt). (1998). Gold & spices: The rise of commerce in the Middle Ages. Teaneck, NJ: Holmes & Meirer; see also Andrews, R. (1998). Brief article on Gold & spices: The rise of commerce in the Middle Ages. Library Journal, August. 33 Moore, K. & Lewis, D. (1999). Birth of the multinational: 2000 years of ancient business history. Copenhagen: Copenhagen Business School Press. 34 Galor, O. & Michalopoulos, S. (2006). The evolution of entrepreneurial spirit and the process of development. London: Centre for Economic Policy Research. 35 Kent et al., Encyclopedia of entrepreneurship, xxix. 36 Davidson, J. D. & William Rees-Mogg, Lord W. (1997). The sovereign individual: How to survive and thrive during the collapse of the welfare state. London: Simon & Schuster. 37 Though Cantillon is usually credited with first using the word ‘entrepreneur’ in the business sense, Oxford English Dictionary lists two earlier occurrences. In the 1475 Boke of Noblesse, William Worcester writes ‘that most noble centoure Publius Decius so hardie an entreprennoure in the bataile’. In 1485, William Caxton in The Lyf of Charles the Grete, wrote ‘Rychard went to fore as chyef entreprenour’. 38 Kirzner, I. M. (1979). Perception, opportunity, and profit: Studies in the theory of entrepreneurship. Chicago: University of Chicago Press, 38–9. 39 See Filion, L. J. (2011). In L. P. Dana (ed.), World encyclopedia of entrepreneurship (pp. 41þ). Cheltenham, UK; Northampton, MA: Edward Elgar; Ronstadt, R. C. (1984). Entrepreneurship, 9–12. 40 Schumpeter, J. (1951). Change and the entrepreneur. In R. V. Clemence (ed.), Essays of J. A. Schumpeter. Reading, MA: Addison-Wesley, 255. 41 Cole, A. (1959). Business enterprise in its social setting. Cambridge, MA: Harvard University Press, 27–8.

36 Part 1: Entrepreneurship in the twenty-first century

42 Shapero, A. (1975). Entrepreneurship and economic development. Project ISEED, Ltd, Milwaukee, WI: Center for Venture Management, Summer, 187. 43 See Formaini, R. L. (2001). The engine of capitalist process: Entrepreneurs in economic theory. Economic & Financial Review, October, available at http:// findarticles.com/p/articles/mi_m0DKI/ is_4_2001/ai_84799963. Formaini credits Elkjaer, J. (1991). The entrepreneur in economic theory: An example of the development and influence of a concept. History of European Ideas, 13(6), 805–15. 44 Ronstadt, R. C. (1984). Entrepreneurship, 28; see also Kuratko, D. F. & Audretsch, D. B. (2009). Strategic entrepreneurship: Exploring different perspectives of an emerging concept (report). Entrepreneurship: Theory and Practice, January. 45 Connelly, B. L., Ireland, R. D., Reutzel, C. R. & Coombs, J. E. (2010). The power and effects of entrepreneurship research. Entrepreneurship Theory and Practice 34(1), 131–49; MacMillan, I. C. & Katz, J. A. (1992). Idiosyncratic milieus of entrepreneurship research: The need for comprehensive theories. Journal of Business Venturing, January, 1–8; Bull, I. & Thomas, H. (1993). A perspective on theory building in entrepreneurship. Journal of Business Venturing, May, 181–2; Bull, I. & Willard, G. E. (1993). Towards a theory of entrepreneurship. Journal of Business Venturing, May, 183–95; MacMillan, I. C. & Katz, J. A. Idiosyncratic milieus of entrepreneurship research: The need for comprehensive theories. Journal of Business Venturing (January 1992), 1–8; Phan, P. H. Entrepreneurship theory: Possibilities and future directions. Journal of Business Venturing 19(5) (September 2004), 617–20; Wadhwani, R. D. (2010). Historical reasoning and the development of entrepreneurship theory. In Landstrom, H. & Lohrke, F. (eds), Historical foundations of entrepreneurship research. Cheltenham, UK, Edward Elgar 343–62; Zachary, R. K. & Mishra, C. S. (2010). Entrepreneurship research today and beyond: Hidden in plain sight! [Article]. Journal of Small Business Management, 48(4), 471–4; Zahra, S. A. (2007). Contextualizing theory building in entrepreneurship research. [Article]. Journal of Business Venturing, 22(3), 443–52; Sarasvathy, S. D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management

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Review, 26(2), 243–63; Shane, S. & Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, January, 217–26. 46 Gartner, W. B. (1990). What are we talking about when we talk about entrepreneurship? Journal of Business Venturing, January, 15–28. See also Herron, L., Sapienza, H. J. & Smith Cook, D. (1992). Entrepreneurship theory from an interdisciplinary perspective. Entrepreneurship Theory and Practice, Spring, 5–12; Saras D. Sarasvathy. The questions we ask and the questions we care about: Reformulating some problems in entrepreneurship research. Journal of Business Venturing 19(5) (September 2004), 707–17; Benyamin B. Lichtenstein, Nancy M. Carter, Kevin J. Dooley & William B. Gartner. Complexity dynamics of nascent entrepreneurship. Journal of Business Venturing 22(2) (2007), 236–61; Peter W. Moroz & Kevin Hindle. Entrepreneurship as a process: Toward harmonizing multiple perspectives. Entrepreneurship Theory and Practice 36(4) (2012), 781–818; and Hindle, K. (2010). Skillful dreaming: Testing a general model of entrepreneurial process with a specific narrative of venture creation. An Issue about The Republic of Tea, 97. 47 See Van de Ven, A. H. (1993). The development of an infrastructure for entrepreneurship. Journal of Business Venturing (May), 211–30; York, J. G. & Venkataraman, S. The entrepreneurenvironment nexus: Uncertainty, innovation, and allocation. Journal of Business Venturing 25(5) (2010), 449–63; and Edelman, L. & Yli-Renko, H. The impact of environment and entrepreneurial perceptions on venture creation efforts: Bridging the discovery and creation views of entrepreneurship. Entrepreneurship Theory and Practice 34(5) (2010), 833–56; Yoo, J. K. (2014). Korean Immigrant Entrepreneurs: Networks and Ethnic Resources. Routledge. 48 See Brophy, D. J. & Shulman, J. M. A finance perspective on entrepreneurship research. Entrepreneurship Theory and Practice (Spring 1992), 61–71; and Truls Erikson. Entrepreneurial capital: The emerging venture’s most important asset and competitive advantage. Journal of Business Venturing 17(3) (2002), 275–90. 49 Ronstadt, Entrepreneurship; and Holland, D. V. & Shepherd, D. A. Deciding to persist: Adversity, values, and entrepreneurs’ decision policies. Entrepreneurship Theory and Practice 37(2), 331–58.

50 Dixon, S. E. A. & Clifford, A. (2007). Ecopreneurship – a new approach to managing the triple bottom line. Journal of Organizational Change Management, 20(3), 326–45; Gibbs, D. (2009). Sustainability entrepreneurs, ecopreneurs and the development of a sustainable economy. Greener Management International, 55, 63–78; Larson, A. L. (2000). Sustainable innovation through an entrepreneurship lens. Business Strategy & the Environment, 9(5), 304–17; Lenox, M. & York, J. G. (2011). Environmental entrepreneurship. Oxford Handbook of Business and the Environment; McEwen, T. (2012). What, why, and how of ecopreneurship: Implications for entrepreneurship education. In Academy of Entrepreneurship 18(2), 33; O’Neill G. D. Jr , Hershauer, J. C. & Golden, J. S. (2009). The cultural context of sustainability entrepreneurship. Greener Management International, 55, 33–46; Schaltegger, S. (2013). Sustainable entrepreneurship. In Encyclopedia of Corporate Social Responsibility (pp. 2458–62). Springer Heidelberg; Schaper, M. (ed.). (2012). Making ecopreneurs: Developing sustainable entrepreneurship. Gower Publishing, Ltd; Shepherd, D. A. & Patzelt, H. (2011). The new field of sustainable entrepreneurship: Studying entrepreneurial action linking ‘What is to be sustained’ with ‘What is to be developed’. Entrepreneurship: Theory & Practice, 35(1), 137–63; York, J. G. & Venkataraman, S. (2010). The entrepreneur–environment nexus: Uncertainty, innovation, and allocation. Journal of Business Venturing, 25(5), 449–63. 51 Baum, J. R. & Locke, E. A. (2004). The relationship of entrepreneurial traits, skill, and motivation to subsequent venture growth. Journal of Applied Psychology. 2004, Vol. 89, No. 4, 587–98.; Bolton, B. & Thompson, J. (2000). Entrepreneurs: Talent, temperament and technique. Oxford: Butterworth Heinemann; Emmeline de P. & Kathleen, K. R. (2007). The influence of personality traits and persuasive messages on entrepreneurial intention: A cross-cultural comparison. Career Development International, 12(4), 382–96; Hoang, H., Javier Gimeno. Becoming a founder: How founder role identity affects entrepreneurial transitions and persistence in founding. Journal of Business Venturing 25(1) (2010), 41–53; Journal of Applied Psychology 89(4), 587–98; Mitchell, J. Robert, Dean A. Shepherd, To thine own self be true: Images of self, images of opportunity, and

Chapter 1: Entrepreneurship: evolution and revolution 37

entrepreneurial action. Journal of Business Venturing 25(1) (2010), 138–54; Mitchell, R. K., Busenitz, L., Lant, T., McDougall, P. P., Morse, E. A. & Smith, J. B. The distinctive and inclusive domain of entrepreneurial cognition research. Entrepreneurship Theory and Practice 28(6) (Winter 2004), 505–18; Okhomina, D. (2010). Entrepreneurial orientation and psychological traits: The moderating influence of supportive environment. Journal of Behavioral Studies in Business, 3, 1–16; Rauch, A. & Frese, M. (2007). Let’s put the person back into entrepreneurship research: A metaanalysis on the relationship between business owners’ personality traits, business creation, and success. European Journal of Work & Organizational Psychology 16(4), 353–85; Shaver, K. G. & Scott, L. R. (1991). Person, process, choice: The psychology of new venture creation. Entrepreneurship Theory and Practice, Winter, 23–45. 52 See Aronsson, M. Education matters – but does entrepreneurship education? An interview with Birch, D. Academy of Management Learning & Education 3(3) (2004), 289–92. 53 See Katz, J. A. The chronology and intellectual trajectory of American entrepreneurship education. Journal of Business Venturing 18(2) (2003), 283–300; Kuratko, D. F. The emergence of entrepreneurship education: Development, trends, and challenges. Entrepreneurship Theory and Practice 29(5) (2005), 577–98; and Shepherd, D. A. Educating entrepreneurship students about emotion and learning from failure. Academy of Management Learning & Education 3(3) (2004), 274–87. 54 Dimov, D. Grappling with the unbearable elusiveness of entrepreneurial opportunities. Entrepreneurship Theory and Practice 35(1) (2011), 57–81; Tang, J., Kacmar, K. M. (Micki) & Busenitz, L. Entrepreneurial alertness in the pursuit of new opportunities. Journal of Business Venturing 27(1) (2012), 77–94; and Gielnik, M. M., Zacher, H. & Frese, M. Focus on opportunities as a mediator of the relationship between business owner’s age and venture growth. Journal of Business Venturing 27(1) (2012), 127–42. 55 See Brockmann, E. N. & Lacho, K. J. (2008). Strategic planning: A practical primer for the entrepreneur. Entrepreneurial Executive, 15(2), 4; Dimov, D. Nascent entrepreneurs and venture emergence: Opportunity confidence, human capital, and early planning. Journal of Management Studies 48(6) (2011), 1123–53; Harms, R., Walsh,

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S. & Groen, A. J. (2012). The strategic entrepreneurship process – new avenues for research. International Journal of Entrepreneurial Behaviour & Research 18(2), 1–1; Ireland, R. D., Hitt, M. A., S. Camp, M. & Sexton, D. L. Integrating entrepreneurship and strategic management actions to create firm wealth. Academy of Management Executive 15(1) (2001), 49–63; Kohtamaki, M., Kautonen, T. & Kraus, S. (2010). Strategic planning and small business performance. An examination of the mediating role of exploration and exploitation behaviours. International Journal of Entrepreneurship and Innovation 11(3), 221–9; Kuratko, D. F. & Audretsch, D. B. (2009). Strategic entrepreneurship: Exploring different perspectives of an emerging concept. Entrepreneurship Theory and Practice 33(1), 1–17; Lyles, M. A., Baird, I. S., Burdeane Orris, J. & Kuratko, D. F. Formalized planning in small business: Increasing strategic choices. Journal of Small Business Management (April 1993), 38–50; Mazzarol, T., Reboud, S. & Soutar, G. N. (2009). Strategic planning in growth oriented small firms. International Journal of Entrepreneurial Behaviour & Research, 15(4), 320–45; van Lambalgen, R. (2012). Strategic entrepreneurship: The next step in understanding successful entrepreneurship. International Journal of Entrepreneurial Behaviour & Research 18(2), 2–2. 56 Ronstadt, Entrepreneurship, 112–15. 57 Hitt, M. A., Ireland, R. D., Camp, S. M. & Sexton, D. L. (2001). Strategic entrepreneurship: Entrepreneurial strategies for wealth creation. Strategic Management Journal (Special issue), 22(6), 479–92. 58 Annan, K. (2009). Secretary-General launches commission on private sector and development at headquarters press briefing. 4 September, http://www.un.org/News/ briefings/docs/2003/UNDPbrf.doc.htm. 59 Global Entrepreneurship Monitor, ‘The GEM Model’, http:// www.gemconsortium.org/Model. 60 Singer S., Amoro´s, J. E., Moska Arreola, D., Global Entrepreneurship Research Association (GERA). Global Entrepreneurship Monitor 2014 Global Report, http://www.gemconsortium.org/ docs/3616/gem-2014-global-report. 61 Birch, D., Gundersen, J., Haggerty, A. & Parsons, W., Corporate Demographics, Cambridge, MA: Cognetics, Inc., 1999. 62 Wise, S. Hunting the gazelle. Toronto Globe and Mail, 7 December 2007. 63 Millennial Branding. Multigenerational entrepreneurship study. 3

March 2013, http://millennialbranding. com/2013/multi-generationalentrepreneurship-study; see also Osborne, C. Are baby boomers more entrepreneurial than Gen Y? ZDNet, 16 March 2013, http://www.zdnet.com/article/are-babyboomers-more-entrepreneurial-than-gen-y. 64 ‘Kids’ smartphone usage rampant, says study’, Sydney Morning Herald, 17 March 2015, http://www.smh.com.au/ digital-life/mobiles/kids-smartphoneusage-rampant-says-study-201503161m0nti.html. 65 Holroyd, J., Talkin’ ’bout my label. Sydney Morning Herald, 20 July 2011, http://www.smh.com.au/lifestyle/dietand-fitness/talkin-bout-my-label20110720-1ho7s.html. 66 Sen, A. (2000). Development as freedom. New York: Anchor Books, 14. 67 Corbridge, S. (2002). Development as freedom: The spaces of Amartya Sen. Progress in Development Studies, 2(3), 183–217. doi: 10.1191/ 1464993402ps037ra. 68 Obama, B. (2015), Remarks By President Obama At The Global Entrepreneurship Summit, July 25, 2015, http://www.ges2015.org/press-releases/ 2015/7/25/remarks-by-president-obamaat-the-global-entrepreneurship-summit; Green, W. S. (2009). From commerce to culture: Entrepreneurship in the mainstream. Handbook of university-wide entrepreneurship education. Cheltenham, UK: Edward Elgar, 15–20. 69 Schumpeter, J. (ed.). (2004). The theory of economic development (vol. 46). Cambridge, MA: Transaction Publishers, 93–4. Fu¨r die Deutschsprachigen unter Euch lautet der Zitat: ’Der Traum und der Wille, ein privates Reich zu gru¨nden, Siegerwille und Freude am Gestalten trieben den Unternehmer an, nicht Bedu¨rfnisbefriedigung, Nutzenkalku¨l oder Gier. Quelle: Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung u¨ber Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus, Berlin 1987, S. 132ff. 70 Locke, J., (2000). Two treatises on government. Birmingham, AL: Palladium Press. See also Locke, J., Second treatise on civil government. Chapter V, Section 27, http://www.gutenberg.org/ebooks/ 7370 71 Bureau of Labor Statistics and US Department of Labor. Occupational outlook handbook 2014 edition, http:// www.bls.gov/oco. 72 Gibb, A. (1999). Can we build effective entrepreneurship through management development? Journal of General Management, 24, 1–21.

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73 Audretsch, D., et al. (2002). Understanding entrepreneurship across countries and over time. Entrepreneurship: Determinants and Policy in a European-US Comparison, 1–10; Thurik, R. & S. Wennekers (2004). Entrepreneurship, small business and economic growth. Journal of Small Business and Enterprise Development 11(1), 140–9; Thurik, R. et al. (2002). Entrepreneurship and economic performance: A macro perspective. International Journal of Entrepreneurship 1(2), 157–79. 74 Atkinson, R. C. & P. A. Pelfrey (2010). Science and the entrepreneurial university. Issues in Science & Technology 26(4), 39. 75 Fetters, M. L., et al. (eds) (2010). The development of university-based entrepreneurship ecosystems: Global practices. Studies in Higher Education. Cheltenham, UK, Edward Elgar. 76 Blair, B. S. (2011). Does entrepreneurship education have value? http://www.babson.edu/News-Events/ babson-news/Pages/110620-doesentrepreneurship-education-have-valuecan-entrepreneurship-be-taught.aspx. 77 University of Arizona. (2000). Graduate entrepreneurs prosper, innovate: New study indicates entrepreneurship

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program alumni start more new businesses, develop more products, make more money than their peers. Entrepreneurship Education Impact Study Findings Summary, June, http:// ebr.eller.arizona.edu/research/ entrepreneurSummary.pdf; Charney, A. & Libecap, G. (2000). The impact of entrepreneurship education: An evaluation of the Berger Entrepreneurship Program at the University of Arizona, 1985–1999. Revised final report to the Kauffman Center for Entrepreneurial Leadership. Kansas City: The Ewing Marion Kauffman Foundation, 29. 78 Torres, A. (2011). [Director, Vice Chancellory for Entrepreneurial Development], Monterrey (Mexico) Institute of Technology. 79 Ho, Y.-P., Singh, A. & Wong, P. K. (2010). National University of Singapore. In M. L. Fetters, P. G. Greene, M. P. Rice & J. S. Butler (eds), The development of university-based entrepreneurship ecosystems: Global practices (pp. 149–76). Cheltenham, UK; Northampton, MA: Edward Elgar, 172. 80 Allen, K. & Lieberman, M. (2010). University of Southern California. In M. L. Fetters, P. G. Greene, M. P. Rice & J. S. Butler (eds). The development of university-based entrepreneurship

ecosystems: Global practices (pp. xii, 203). Cheltenham, UK; Northampton, MA: Edward Elgar, 78. 81 Martı´nez, A., Levie, J., Kelley, D., Sæmundsson, R. & Schøtt, T. (2010). A global perspective on entrepreneurship education and training. Global Entrepreneurship Monitor Special Report, http://www.gemconsortium.org/report. 82 Gibb, A. & Hannon, P. (2006). Towards the entrepreneurial university. International Journal of Entrepreneurship Education, 4(1), 73. 83 Allenby, B. R., Richards, D. J. & National Academy of Engineering. (1994). The greening of industrial ecosystems. Washington, DC: National Academy Press, 36. 84 Cohen, B. (2006). Sustainable valley entrepreneurial ecosystems. Business Strategy and the Environment, 15(1), 1–14. 85 Isenberg, D. J. (2010). How to start an entrepreneurial revolution. Harvard Business Review, 88(6), 40–50. 86 Aulet, B. (2008). How to build a successful innovation ecosystem: Educate, network, and celebrate. Xconomy.com, 14. 87 Adapted from Isenberg, D. J. (2010). How to start an entrepreneurial revolution.

» CHAPTER TWO THE ENTREPRENEURIAL MIND-SET: COGNITION AND CAREER CHAPTER OBJECTIVES

1

To profile demographic features of entrepreneurs from around the globe

2 To identify and discuss the most commonly cited characteristics found in successful entrepreneurs 3 To examine entrepreneurial psychology 4 To discuss the ‘dark side’ of entrepreneurship 5 To identify and describe the different types of risk entrepreneurs face 6 To identify the major causes of stress for entrepreneurs and the ways they can handle stress 7 To discuss important aspects with respect to the entrepreneurial ego and an entrepreneurial career

For all we know about balance sheets, income statements and cash flow accounting; for all of our understanding about marketing strategies, tactics and techniques; and for everything we have learned about management principles and practices, there remains something essential, yet mysterious, at the core of entrepreneurship. It is so mysterious that we cannot see it or touch it; yet we feel it and know it exists. It cannot be mined, manufactured or bought; yet it can be discovered. Its source is invisible; yet its results are tangible and measurable. This mysterious core is so powerful that it can make the remarkable appear ordinary, so contagious that it can spread like wildfire from one to another and so persuasive that it can transform doubt and uncertainty into conviction. This mysterious core is PASSION! Ray Smilor, Daring Visionaries1

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

40 Part 1: Entrepreneurship in the twenty-first century

THE ENTREPRENEURIAL MIND, BEHAVIOUR AND CAREER This chapter is devoted to a more personal look at entrepreneurs; it describes the most common characteristics associated with successful entrepreneurs as well as elements associated with the ‘dark side’ of entrepreneurship. It also examines critical contributions in specific capabilities that shape the entrepreneur’s career. In this manner we can become more acquainted with the complete perspective involved with entrepreneurial behaviour that is influenced by the entrepreneurial mind. Although certainly not an exact science, examining the entrepreneurial mind provides an interesting look at the entrepreneurial potential within every individual.2 We believe that every person can become the sole proprietor of their own destiny at some point in their lives and carve out a career in entrepreneurship. Why do people become entrepreneurs? There are so many reasons. Most entrepreneurs have a strong desire to be independent. Some, from an early age, seek autonomy. For others it’s because they find it unfulfilling to work on another person’s dreams and help them become rich. They may see limited opportunities for advancement or they may become bored with the same work every day. Ultimately, they want to be their own bosses and wealth creation may be part of the motivation. Entrepreneurs believe it is better to invest in themselves than to park their earnings in a low-interest savings account. Job satisfaction, achievement, opportunity and money are often thought to be primary motivations for people to launch their own venture. These are what we call opportunity-driven entrepreneurs. On the other side of the spectrum are necessity-driven entrepreneurs. Their decision to start a business comes out of some kind of adversity. Maybe one person in a two-person family is transferred and the other becomes the ‘trailing spouse’. Their job is made redundant. Needs are not being met. Around the world, economic dislocation and even civil war push people to become necessity entrepreneurs, those who have no better choice for work than to become an entrepreneur.3 Sometimes entrepreneurs emerge from deprived, minority or marginal classes of society. ‘I’ll show them’, they say – that’s called self-efficacy, a belief in oneself. It propels them to be entrepreneurial, to overcome the psychological disequilibrium between their own ‘prodigious’ talents compared to the discrimination or disadvantage they face. We often see the most entrepreneurial people to be youth, Indigenous people or immigrants; for example, female Indian immigrants in London, Chinese people living in Singapore, gay entrepreneurs in Sydney or San Francisco, Palestinians in the Arab Gulf or even enterprising religious minorities, such as Sikhs in Australia. Let’s look around the world. In 2011 the Global Entrepreneurship Monitor (GEM) estimated that there were in the order of 388 million entrepreneurs around the globe.4 In 2014 the GEM research teams surveyed 73 country economies to report on what GEM calls the total early-stage entrepreneurial activity (TEA) Index,5 or an index that reports the number of those by percentage who are actively involved in starting a business or running a business that was no more than three and a half years old. The variation of entrepreneurial activity across the nations is quite remarkable, being as low as less than 5 per cent of the population for countries like Italy, Japan and Russia and as high as greater than 35 per cent for countries such as Cameroon and Uganda. GEM divides the surveyed economies into groups that represent three levels of economic development: factor-driven, efficiency-driven and innovation-driven. The three divisions in levels of economic development are based upon gross domestic product (GDP) per capita and the share of exports represented by primary goods as defined by the World Economic Forum’s Global Competitiveness Report.6 The GEM data over its 15 years of operation shows that the profile or type of entrepreneurship activity in a nation is related to the level of wealth as measured by GDP per capita.

Chapter 2: The entrepreneurial mind-set: cognition and career 41

The key point from this analysis is not the discussion of quantity of entrepreneurs in an economy but rather the type of entrepreneurial activity that accompanies the level of wealth in a nation. GEM argues that the poorer the country, the more the entrepreneurial activity is motivated by necessity (see above), that is, the entrepreneurs have no other choice for earning a living. By contrast the wealthier the country, the more the entrepreneurial activity tends to be driven by the specific perception of an opportunity to start a business. This division in types of entrepreneurial motivations to start a business has become distinguished by the labels necessity-driven and opportunity-driven entrepreneurship. Figure 2.1 shows the proportional representation of men and women involved in early stage ventures across the spectrum of the 73 nations and divided into geographic regions. The proportion of women entrepreneurs is generally lower across the vast majority of nations, being as low as around 5 per cent of women participating in early-stage entrepreneurial activity in Europe and as high as nearly 25 per cent in Africa. The variation among men on the other hand is as low as 7 per cent in the non-European Union nations (in Europe) and as high as more than 27 per cent in Africa. In the Asia-Oceania region women participation rates are approximately 11.5 per cent and for men, 14.5 per cent. Within the Asia–Pacific region, the highest participation rates were in Thailand with 24.53 per cent and 22.12 per cent for men and women, respectively, while the lowest was recorded in Japan with 6.12 per cent and 1.50 per cent for men and women respectively. Australia’s TEA Index for men and women respectively is 15.97 and 10.32 per cent. 30

FIGURE 2.1 THE PROPORTION OF ADULT MALE AND FEMALE POPULATION REPRESENTED IN GEM’S 2013 TEA INDEX

Percentage of adult population (18-64 years)

25

20

15

10

5

0 Africa

Asia and Oceania

Latin America and Caribbean

TEA male

European Union

Non-European Union

North America

TEA female

Source: Global Entrepreneurship Monitor, 2014 Global Report, p. 46, by Singer, S., Amoros, J. E., Moska, D., and Global Entrepreneurship Research Association. Used with permission.

42 Part 1: Entrepreneurship in the twenty-first century

The ‘ages of entrepreneurship’ are also interesting. ‘Teenage entrepreneurship’ is very hard to find as most people go through university and come out with student loans to pay off, though there are good examples of university dropouts like Bill Gates (Microsoft) or Mark Zuckerberg (Facebook). But you will definitely spot them pushing lawn mowers, shovelling snow and dog-walking. One survey shows 61 per cent of high school students in the USA want to be an entrepreneur.7 Nonetheless, the GEM report reveals that when considering all entrepreneurs, regardless of stage of entrepreneurial development, the highest proportion of entrepreneurs are in the 35–44 years and 45–54 years age brackets. Typically the rate of entrepreneurship activity drops off after age 55, but in recent years the rate of ‘Third Age entrepreneurs’ (sometimes called Seniorpreneurs) has been rising in some countries. This is due to a variety of factors. Push factors could include being made redundant, losing one’s superannuation value in the global financial crisis (GFC), or a death in the family. Factors that pull those older than 55 to become an entrepreneur include: the children leaving home, fulfilling a dream to start a business, or accumulating knowledge and experience to spot a smart opportunity. Figure 2.2 shows the most and least seniorpreneurial countries. These figures show the FIGURE 2.2 AGE PROPORTIONS OF ENTREPRENEURS SHOWING MOSTAND LEAST‘SENIORPRENEURIAL’ COUNTRIES (%), 2010

45 40 35 30 25 20 15 10 5 0

Japan

Sweden

Israel

Hungary

Belgium

Norway

Switzerland

Australia

60 50 40 30 20 10 0

Taiwan

Latvia

Russia

West Bank Macedonia Montenegro Bosnia and and Gaza Strip Herzegovina

% Entrepreneurs 18–24

% Entrepreneurs 25–34

% Entrepreneurs 45–54

% Entrepreneurs 55–64

France

Mexico

% Entrepreneurs 35–44

Source: Own analysis of Global Entrepreneurship Monitor 2010 data.

Chapter 2: The entrepreneurial mind-set: cognition and career 43

proportion of entrepreneurs in their age brackets whatever the whole country’s total entrepreneurship activity. In countries like Japan, the number of entrepreneurs over age 54 is actually the highest of the age brackets, as it is in Sweden. Australia sits among the most seniorpreneurial countries. The least seniorpreneurial countries are Macedonia, Montenegro and Russia; and (curiously) France is among this group. One explanation for this occurrence in countries like France could possibly be the cradle-to-grave welfare state meaning that welfare is sufficient to act as a deterrent for older folk to exert the effort to become an entrepreneur. For most countries, the proportion of entrepreneurs over age 54 drops off precipitously. Researchers are just beginning to look at these phenomena. In 2013 GEM also examined measures of wellbeing among entrepreneurs from around the globe and it is reported that greater than 50 per cent and up to 75 per cent of people, depending upon the state of their economy’s development, perceived entrepreneurship to be a good career choice. Also interesting, entrepreneurs, on average across the surveyed nations, whether they were early stage start-up entrepreneurs or those with relatively established businesses, reported a perceived higher level of wellbeing than those who were not involved in entrepreneurship activities. Wellbeing was measured through five questions about a person’s level of satisfaction with their current life. Every person, regardless of age or gender, has the potential and the free choice to pursue a career as an entrepreneur. The economic and cultural circumstances of a nation or region do, however, also play a part in influencing the decision to enter entrepreneurship. Exactly what motivates individuals to make a choice for entrepreneurship has not been identified as one single event, type of circumstance, characteristic or trait. As demonstrated in Chapter 1, researchers are continually striving to learn more about the entire entrepreneurial process to better understand the driving forces within entrepreneurs.8 But what is clearly suggested by the GEM research is that entrepreneurs are likely to find deep satisfaction in their work because at the heart of it all is a career choice that allows an individual freedom of expression and the opportunity to live an authentic life being true to one’s ideals, motivations, and ambitions.9

WHO ARE ENTREPRENEURS? Entrepreneurs are optimistic, hard-driving, committed individuals who derive great satisfaction from being independent. Starting a new business requires more than just an idea; it requires sound judgement and planning along with an approach that reduces risk to provide the best chance of ensuring the survival and success of a new venture. In current times, as The Economist explains, the entrepreneur’s job is like zeroing in on a target: first, you have to identify customer needs, then you build something that responds to those needs. You observe and assess the extent to which the new product/service addresses those needs successfully and continue to repeat the process until you achieve the right ‘product-market fit’. There is no pay-off until you find the right combination of product (and/or service), customer need and market with sufficient potential to sustain a business.10 Bolton and Thompson define an entrepreneur as ‘a person who habitually creates and innovates to build something of recognised value around perceived opportunities’. A person can also be a group of people, since it is possible to describe teams and even organisations as entrepreneurial. The word ‘person’ though suggests that a personality, or personalities are involved that cannot be replaced by a system. Habitualness is an important characteristic of entrepreneurs that distinguishes them from business owner-managers or people who build a business simply to achieve a comfortable lifestyle. Entrepreneurs just cannot stop being entrepreneurs!11 Some may focus their energies on a single

44 Part 1: Entrepreneurship in the twenty-first century

venture while others may engage again and again in creating new ventures. (We jokingly call them ‘repeat offenders’!) Entrepreneurs are driven by an intense commitment and determined perseverance. They are optimists who see the cup as half full rather than half empty. They strive for integrity. They burn with the competitive desire to excel. They use failure as a tool for learning. They have enough confidence in themselves to believe they personally can make a major difference in the final outcome of their ventures.12 The substantial failure rate attests to how difficult it is to be an entrepreneur. It can be chalked up to inexperience or incompetence. But what distinguishes the successful ones? Are these traits or characteristics different for social and business entrepreneurs? These are some of the issues we next explore.

ENTREPRENEURIAL COGNITION One of the hottest topics in the research literature is entrepreneurial cognition: entrepreneurs actually think differently from other people. In science, cognition refers to mental processes, including attention, remembering, producing and understanding language, solving problems and making decisions. It means the ability to process information, apply knowledge and change preferences. Social cognition theory looks at situation-based mental models (cognitions) that optimise personal effectiveness. Mitchell et al. define entrepreneurial cognition as the knowledge structures that people use to make assessments, judgements, or decisions involving opportunity evaluation, venture creation, and growth.13 Entrepreneurs use simplifying mental models to piece together previously unconnected information that helps them to identify and invent new products or services, and to assemble the necessary resources to start and grow businesses. Consider the entrepreneur challenged to give a sound explanation for a new venture to a venture capitalist. Even before evaluating alternative strategies, the entrepreneur must first formulate a strategy to frame how he or she will ‘think’ about this task. Many people believe that entrepreneurs ‘think’ differently than other individuals. In the simplest of theoretical terms,

Entrepreneurship ¼ f (entrepreneur) This simple formula states that entrepreneurship is a function of the entrepreneur, a real individual with passions, experiences and knowledge living in a particular culture and time period. Looking at the characteristics of these real individuals helps us understand entrepreneurship. Does the following describe you or any of your friends? Would-be entrepreneurs live in a sea of dreams. Their destinations are private islands – places to build, create and transform their particular dreams into reality. Being an entrepreneur entails envisioning your island and even more important, it means getting in the boat and rowing to your island. Some leave the shore and drift aimlessly in the shallow waters close to shore, while others paddle furiously and get nowhere, because they don’t know how to paddle or steer. Worst of all are those who remain on the shore of the mainland, afraid to get in the boat. Yet, all those dreamers may one day be entrepreneurs if they can marshal the resources – external and internal – needed to transform their dreams into reality.14

Entrepreneurs typically have skills like inner control, planning and goal setting, risk taking, innovation, reality perception, use of feedback, decision making, human relations and independence. They are also not afraid to come back from failure.

Chapter 2: The entrepreneurial mind-set: cognition and career 45

Research continues to expand our understanding of the entrepreneurial mind. Here we are looking at how entrepreneurs perceive, recognise, conceive, judge, sense, reason, remember and imagine. Gartner examined the literature and found a diversity of reported characteristics.15 Psychologists have put together a set of profile dimensions that characterise entrepreneurs.

DETERMINATION AND PERSEVERANCE More than any other factor, total dedication to success and focus on advantage can overcome obstacles and setbacks. Sheer determination and a stubborn, unwavering commitment to succeed often wins out against odds that many people would consider insurmountable. These characteristics can also compensate for personal shortcomings although when a venture faces adversity, entrepreneurs who value such things as openness to change and the non-financial benefits of a business (rather than money) are also prone to making decisions to persist, ignoring objective data, ultimately leading to failure.16 Potential investors or angels take the measure of entrepreneurial determination. Is the entrepreneur willing to mortgage their own house, take a pay-cut, sacrifice family time and reduce their standard of living for long-term gain?

DRIVE TO ACHIEVE Entrepreneurs are self-starters who appear to others to be internally driven by a strong desire to compete, to excel against self-imposed standards and to pursue and attain challenging goals. This drive to achieve has been well documented in the entrepreneurial literature beginning with David McClelland’s pioneering work on motivation in the 1950s and 1960s.17 McClelland suggested that the key to entrepreneurial behaviour lies in the need to achieve. High achievers take calculated risks. They examine a situation, determine how to increase the odds of winning and then push ahead. A high-risk decision for the average businessperson is often perceived as a moderate risk decision for the well-prepared high achiever.

OPPORTUNITY ORIENTATION One clear pattern among successful, growth-minded entrepreneurs is their focus on opportunity rather than on resources, structure or strategy. Opportunity orientation is the constant awareness of the opportunities that exist in everyday life. Successful entrepreneurs start with the opportunity and let their understanding of it guide other important issues. They are goal-oriented in their relentless pursuit of opportunities. Setting high but attainable goals enables them to focus their energies selectively to sort out opportunities and to know when to say ‘no’. Their goal orientation also helps them to define priorities and provides them with measures of how well they are performing.

PERSISTENT PROBLEM SOLVING Entrepreneurs are not intimidated by difficult situations. In fact, their self-confidence and general optimism seem to translate into a view that the impossible just takes a little longer. Yet they are neither aimless nor foolhardy in their relentless attack on a problem or an obstacle that is impeding business operations. If the task is extremely easy or is unsolvable, entrepreneurs often will give up sooner than others. Simple problems bore them; unsolvable ones do not warrant their time. Moreover, although entrepreneurs are extremely persistent they are realistic in recognising what they can and cannot do and where they can get help in solving difficult but unavoidable tasks.

Go to CourseMate Express to test yourself: What kind of entrepreneur are you psychographically? Freedom fighter or mountain climber?

46 Part 1: Entrepreneurship in the twenty-first century

SEEKING FEEDBACK Effective entrepreneurs are often described as quick learners. Unlike many people, however, they also have a strong desire to know how well they are doing and how they might improve their performance. In attempting to make these determinations, they actively seek out mentors and use their feedback. Feedback is also central to their learning from their mistakes and setbacks.

INTERNAL LOCUS OF CONTROL Successful entrepreneurs believe in themselves. They do not believe the success or failure of their venture will be governed by fate, luck or similar forces. They believe their accomplishments and setbacks are within their own control and influence and that they can affect the outcome of their actions. This attribute is consistent with a high-achievement motivational drive, the desire to take personal responsibility and self-confidence.

TOLERANCE FOR AMBIGUITY Best known for his bold failures, one entrepreneur bets on the Yugo, Zastrava, and Chery automobiles. Find out more about him on CourseMate Express.

Start-up entrepreneurs face uncertainty multiplied by constant change. This introduces ambiguity and stress into every aspect of the enterprise. Setbacks and surprises are inevitable; lack of organisation, structure and order is a way of life. Yet successful entrepreneurs thrive on the fluidity and excitement of such an ambiguous existence and generally have a high tolerance for ambiguity. Job security and retirement generally are of no concern to them.

CALCULATED RISK TAKING Successful entrepreneurs are not gamblers – if they decide to participate in a venture, they do so in a very calculated, carefully thought-out manner. They do everything possible to get the odds in their favour and they often avoid taking unnecessary risks. These strategies include getting others to share inherent financial and business risks with them – for example, by persuading partners and investors to put up money, creditors to offer special terms and suppliers to advance merchandise.

TOLERANCE FOR FAILURE

Go online to learn more about how to deal with failure.

Entrepreneurs use failure as a learning experience and generally have a high tolerance for failure. The iterative, trial-and-error nature of becoming a successful entrepreneur makes serious setbacks and disappointments an integral part of the learning process. They do not become disappointed, discouraged or depressed by a setback or failure. Many believe they learn more from their early failures than from their early successes. Entrepreneurs differentiate between noble failure and stupid failure.18 Although failure can be an important source of information for learning, this learning is not automatic or instantaneous. The emotions generated by failure (i.e. grief) can interfere with the learning process.

HIGH ENERGY LEVEL The extraordinary workloads and the stressful demands faced by entrepreneurs place a premium on energy. Many entrepreneurs fine-tune their energy levels by carefully monitoring what they eat and drink, establishing exercise routines and knowing when to get away for relaxation.

CREATIVITY AND INNOVATIVENESS Creativity was once regarded as an exclusively inherited trait. Looking around the world we see that cultures differ very much in terms of creativity and innovation. Some, like Singapore, are known less

Chapter 2: The entrepreneurial mind-set: cognition and career 47

for their innovation than for their industriousness. Others, like New Zealand, have a very strong streak of innovation running throughout the culture. It appears likely that creativity is less a genetic trait than a cultural characteristic – one that can be learned (Chapter 6 provides a comprehensive examination of this critical characteristic).

VISION Entrepreneurs know where they want to go. They have a vision or concept of what their business can be. For example, Steve Jobs, one of the founders of Apple Computer Inc., wanted his business to provide microcomputers that could be used by everyone from schoolchildren to businesspeople. The computer would be more than a machine. It would be an integral part of the person’s life in terms of learning and communicating. This vision helped make Apple a major competitor in the microcomputer industry. However, not all entrepreneurs have predetermined visions for their business. In many cases, this vision develops over time as the individual begins to realise what the business is and what it can become.

PASSION Entrepreneurial passion is a fundamental emotional experience for entrepreneurs. Cardon has devoted much of her efforts on examining this element of the entrepreneurial mind-set.19 She has found that entrepreneurial passion is an expression constructed by the entrepreneur to provide a coherent understanding to an emotional experience of intense arousal and energy mobilisation involving an entrepreneur and his or her venture. Moreover, entrepreneurial passion is characterised by a discrete emotion that is quite intense, having been described as an underlying force that fuels our strongest emotions, or the intensity felt when engaging in activities that are of deep interest, or the energy that enables entrepreneurs to achieve peak performance. Thus, entrepreneurial passion is recognised as a fundamental component of the entrepreneurial mind-set.

TEAM-BUILDING The desire for recognition and autonomy does not preclude the entrepreneur’s desire to build a strong entrepreneurial team. Successful entrepreneurs need to have highly qualified, well-motivated teams that help handle the venture’s growth and development. Teams with past experience together can have an even stronger effect on the new venture’s survival and successful growth.20 In fact, although the entrepreneur may have the clearest vision of where the business is (or should be) headed, the personnel are often more qualified to handle day-to-day implementation challenges.21 While these are likely an incomplete list of characteristics identified as entrepreneurial, they do provide an important backdrop for the discussion of the entrepreneurial mind. Importantly, they cannot always identify who is and who is not an entrepreneur.22 At best, they serve as a guide and no single entrepreneur exhibits all traits. Regardless, human curiosity drives many of us and at the end of this chapter you will find an Experiencing Entrepreneurship link to an entrepreneurial assessment. Use it to understand your own strengths and weaknesses and then set about finding ways to compensate for weaknesses and capitalise on strengths. Next we consider how these traits relate to being an entrepreneur. Read the following ‘Entrepreneurship in Practice: Are you cut out to be an entrepreneur?’ to see what one entrepreneur says is important in building an entrepreneurial career.

On CourseMate Express see how a very different culture interprets entrepreneurship. Let’s go to Samoa in the Pacific.

48 Part 1: Entrepreneurship in the twenty-first century

ARE YOU CUT OUT TO BE AN ENTREPRENEUR? Not everyone is cut out to be an entrepreneur, and with more than 30 per cent of small businesses failing in their start-up, it’s worth checking out the traits that characterise some of Australia’s success stories before you start a business. One of Australia’s best-known entrepreneurs is Naomi Simson, founder of online gift retailer IN PRACTICE RedBalloon. She is often asked what character traits are needed to succeed in business. ‘I usually defer to businessman and entrepreneur Jack Cowin who puts it better than I ever could,’ Simson says. ‘I saw Jack present at the EY Entrepreneurs workshop, where he opened with the quote ‘‘an entrepreneur needs to be a cross between a microbiologist and an astronomer’’. He believes that true entrepreneurs are special in that they can be both detailed and visionary.’ Simson says great entrepreneurs are curious, persistent, are searching for better ways to do things, endlessly positive, focused and have exemplary people skills. While entrepreneurs can be born with these traits, she says some can also be learned. ‘Curiosity and positivity are hard things to teach – you either have them or you don’t,’ she says. ‘But characteristics like focus and persistence can be learned, and need to be – without them you’re unlikely to make it as an entrepreneur or business owner.’ Simson attributes the success of her own business to tenacity and hard work. ‘It was almost three months before RedBalloon made its first sale,’ she says. ‘People used to ask me ‘‘when [are] you going to give up?’’ but the thought never crossed my mind. I never, ever thought that it would not work and I never contemplated throwing in the towel.’ Australia’s tall poppy syndrome can be a factor in potentially successful entrepreneurs falling by the wayside. Simson says entrepreneurs can be derided if they get ‘above their post’, take a risk, and fail. ‘This is not very productive in a country that needs strong, decisive leaders more than ever,’ she says. ‘As entrepreneurs – anywhere in the world – we often have trouble imagining failure in the first place. But that doesn’t mean failing is a bad thing. Failure is very much a reality of being an entrepreneur – we take risks and sometimes those risks don’t pay off.’

ENTREPRENEURSHIP

Source: Gayle Bryant, ‘Are you cut out to be an entrepreneur?’, The Age, My Small Business, 5 August 2013. Copyright ª 2013 by Fairfax Media. Used by permission.

THE DARK SIDE OF ENTREPRENEURSHIP Do entrepreneurs suffer more from mental disorders than other people? After all, it takes a little bit of madness to start a business and, just as surely, a business can drive one a little bit mad. A great deal of literature is devoted to extolling the rewards, successes and achievements of entrepreneurs. However, there is also a dark side of entrepreneurship (see also the discussion on criminal entrepreneurs in Chapter 4). In examining this dual-edged approach to the entrepreneurial personality, Kets de Vries has acknowledged the existence of certain negative factors that may surround entrepreneurs and dominate their behaviour.23 Among entrepreneurs, you can find those who have failed and were exposed as well as those who destroyed something that was important to others. For some, it was an error of judgement – we call them failed entrepreneurs. But some entrepreneurs exhibit criminal behaviour. It is no accident that many people, especially in Australia, associate the word ‘entrepreneur’ with rogues and wheeler-dealers. In Entrepreneurs, Bolton and Thompson even have an entire chapter entitled ‘Entrepreneurs in the shadows’. They examine: • opportunist entrepreneurs who either adopt a flawed strategy or fail to deliver • inventors who become failed entrepreneurs as they lack key project championing capabilities • empire-builders who grow too quickly and lose control – sometimes involving a creative cover-up strategy • entrepreneurs who make mistakes, or whose business fails, but who determinedly make a comeback • entrepreneurs who attract controversy • dishonest entrepreneurs.24

Chapter 2: The entrepreneurial mind-set: cognition and career 49

THE ENTREPRENEUR’S CONFRONTATION WITH RISK Entrepreneurs face a number of different types of risk. These can be grouped into four basic areas: (1) financial risk, (2) career risk, (3) family and social risk and (4) psychic risk.25

FINANCIAL RISK In most new ventures the individual puts a significant portion of their savings or other resources at stake, which creates a serious financial risk. This money or these resources will, in all likelihood, be lost if the venture fails. The entrepreneur may also be required to sign personally on company obligations that far exceed their personal net worth. The entrepreneur is therefore exposed to personal bankruptcy. Many people are unwilling to risk their savings, house, property and salary to start a new business.

CAREER RISK A question frequently raised by would-be entrepreneurs is whether they will be able to find a job or go back to their old job should their venture fail. This career risk is a major concern to managers who have a secure job with a high salary and a good benefits package.

FAMILY AND SOCIAL RISK Starting a new venture uses much of the entrepreneur’s energy and time. Consequently, their other commitments may suffer and there is increased family and social risk. Entrepreneurs who are married, especially those with children, expose their families to the risks of an incomplete family experience and the possibility of permanent emotional scars. In addition, old friends may vanish slowly because of missed get-togethers.

PSYCHIC RISK The psychic risk may be the greatest risk to the wellbeing of the entrepreneur. Money can be replaced; a new house can be built; spouse, children and friends can usually adapt. But some entrepreneurs who have suffered financial catastrophes have been unable to bounce back, at least not immediately. The psychological impact has proven too severe for them.

STRESS AND THE ENTREPRENEUR Some of the most common entrepreneurial goals are independence, wealth and work satisfaction. Research studies of entrepreneurs show that those who achieve these goals often pay a high price.26 A majority of entrepreneurs surveyed had back problems, indigestion, insomnia or headaches. To achieve their goals, however, these entrepreneurs were willing to tolerate these effects of stress. For them, the rewards justified the costs.

WHAT IS ENTREPRENEURIAL STRESS? In general, entrepreneurial stress can be viewed as a function of discrepancies between a person’s expectations and ability to meet demands, as well as discrepancies between the individual’s expectations and personality. If a person is unable to fulfil role demands, stress occurs. When entrepreneurs’ work demands and expectations exceed their abilities to perform as venture initiators, they are likely to experience stress. One researcher has pointed out how entrepreneurial roles and operating environments can lead to stress. Initiating and managing a business requires taking

On CourseMate Express read about ‘My personal story of bankruptcy. Legendary Kiwi entrepreneur bares his soul’.

50 Part 1: Entrepreneurship in the twenty-first century

On CourseMate Express read about Entrepreneurial Fear 101. How to overcome and make it help you in your career?

Go online to learn more about how the sources of stress and some tools for dealing with it.

significant risk. As previously mentioned these risks may be described as financial, career, family, social or psychic. Also, entrepreneurs must engage in constant communication activities – interacting with relevant external constituencies including customers, suppliers, regulators, lawyers and accountants – which can be stressful. Lacking the depth of resources, entrepreneurs must bear the cost of their mistakes while playing a multitude of roles, such as salesperson, recruiter, spokesperson and negotiator. These simultaneous demands can lead to role overload. Owning and operating a business requires a large commitment of time and energy, often, as noted previously, at the expense of family and social activities. Finally, entrepreneurs are often working alone or with a small number of employees and therefore lack the support from colleagues that may be available to managers in a large corporation.27 In addition to the roles and environment of an entrepreneur’s experience, stress can result from a basic personality structure. Referred to as Type A behaviour, this personality structure describes people who are impatient, demanding and over-strung. These individuals gravitate towards heavy workloads and find themselves completely immersed in their business demands. Some of the distinguishing characteristics associated with Type A personalities are as follows: • Chronic and severe sense of time urgency. For instance, type A people become particularly frustrated in traffic jams. • Constant involvement in multiple projects subject to deadlines. Type A people take delight in the feeling of being swamped with work. • Neglect of all aspects of life except work. These workaholics live to work rather than work to live. • A tendency to take on excessive responsibility. Often combined with the feeling that ‘only I am capable of taking care of this matter’. • Explosiveness of speech and a tendency to speak faster than most people. Type A people are prone to ranting and swearing when upset. Therefore, to better understand stress, entrepreneurs need to be aware of their particular personality as well as the roles and operating environments that differentiate their business pursuits.28 see also the Entrepreneurship in Practice box, ‘The entrepreneurial life cycle’ later in this chapter).

THE ENTREPRENEURIAL EGO In addition to the challenges of risk and stress, the entrepreneur may also experience the negative effects of having an ego, especially in countries that value modesty and circumspection. In other words, certain characteristics that usually propel entrepreneurs into success can also be exhibited to their extreme. We examine four of these characteristics that may hold destructive implications for entrepreneurs.29

AN OVERBEARING NEED FOR CONTROL Entrepreneurs are driven by a strong need to control both their venture and their destiny. This internal locus of control spills over into a preoccupation with controlling everything. An obsession for autonomy and control may cause entrepreneurs to work in structured situations only when they have created the structure on their terms. This, of course, has serious implications for networking in an entrepreneurial team since entrepreneurs can visualise others as a threat or infringement of their will. Thus the same characteristic that entrepreneurs need for successful venture creation also contains a destructive side.

Chapter 2: The entrepreneurial mind-set: cognition and career 51

SENSE OF DISTRUST To remain alert to competition, customers and government regulations, entrepreneurs are continually scanning the environment. They try to anticipate and act on developments that others might recognise too late. This distrustful state can result in their focusing on trivialities, causing them to lose sight of reality, to distort reasoning and logic and to take destructive actions. Again, distrust is a dual-edged characteristic.

OVERRIDING DESIRE FOR SUCCESS The entrepreneur’s ego is involved in the desire for success. Although many of today’s entrepreneurs believe they are living on the edge of existence, constantly stirring within them is a strong desire to succeed in spite of the odds. Therefore, the entrepreneur rises up as a defiant person who creatively acts to deny any feelings of insignificance. The individual is driven to succeed and takes pride in demonstrating that success. Therein lie the seeds of possible destructiveness. If the entrepreneur seeks to demonstrate achievement through the erection of a monument – such as a huge office building, an imposing factory or a plush office – then the danger exists that the individual will become more important than the venture itself. Losing perspective like this can be the destructive side of the desire to succeed.

UNREALISTIC OPTIMISM The ceaseless optimism that emanates from entrepreneurs (even through the bleak times) is a key factor in the drive towards success. Entrepreneurs maintain a high enthusiasm level that becomes an external optimism, which allows others to believe in them during rough periods. However, when taken to its extreme, this optimistic attitude can lead to a fantasy approach to the business. A self-deceptive state may arise in which entrepreneurs ignore trends, facts and reports and delude themselves into thinking everything will turn out fine. This type of behaviour can lead to an inability to handle the reality of the business world. These examples do not imply that all entrepreneurs fall prey to these scenarios, nor that each of the characteristics presented always gives way to the ‘destructive’ side. Nevertheless, all potential entrepreneurs need to know that the dark side of entrepreneurship exists.

DEALING WITH STRESS How can entrepreneurs improve the quality of their business and personal lives? Following are six specific ways entrepreneurs can cope with stress.

ENTREPRENEURIAL

Networking One way to relieve the loneliness of running a business is to share experiences by networking with other business owners. The objectivity gained from hearing about the triumphs and errors of others is itself therapeutic.

EDGE

Getting away from it all The best antidote to immersion in business, report many entrepreneurs, is a holiday. If vacation days or weeks are limited by valid business constraints, short breaks still may be possible. Such interludes allow a measure of self-renewal. Communicating with employees Entrepreneurs are in close contact with employees and can readily assess the concerns of their staffs. The personal touches often unavailable in large corporations – such as company-wide outings, flexible hours and small loans to tide

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workers over until payday – are possible here. In such settings, employees often are more productive than their counterparts in large organisations and may experience less stress due to the personal touches that are applied. Finding satisfaction Outside the company, countering the obsessive need to achieve can be difficult, because the entrepreneur’s personality is inextricably woven into the company fabric. Entrepreneurs need to get away from the business occasionally and become more passionate about life itself; they need to gain some new perspectives. Delegating Implementation of coping mechanisms requires implementation time. To gain this time, the entrepreneur has to delegate tasks. Entrepreneurs find delegation difficult, because they think they have to be at the business all of the time and be involved in every aspect of the operation. But if time is to be used for alleviation of stress, appropriate delegates must be found and trained. Exercising rigorously Research by Goldsby and colleagues looked at two types of exercise – running and weightlifting – and what impact they had with sales volume, extrinsic rewards, and intrinsic rewards. The results indicated that running is positively related to all three outcome variables, and weightlifting is positively related to extrinsic and intrinsic rewards. This study demonstrates the value of exercise regimens on relieving the stress associated with entrepreneurs. Sources: David P. Boyd & David E. Gumpert, ‘Coping with entrepreneurial stress’, Harvard Business Review (March/April 1983), 46–56; and Michael G. Goldsby, Donald F. Kuratko & James W. Bishop, ‘Entrepreneurship and fitness: An examination of rigorous exercise and goal attainment among small business owners’, Journal of Small Business Management 43(1) (January 2005), 78–92; see also Moren Levesque & Maria Minniti, ‘The effect of aging on entrepreneurial behavior’, Journal of Business Venturing 21(2) (2006), 177–94.

PATHWAYS TO YOUR ENTREPRENEURIAL CAREER Simply put, an entrepreneurial career means finding the pathways toward creating ventures that are right for you. Although that is a true statement, its narrow framing overlooks the stresses and tribulations, the agony and the ecstasy, the perseverance and journey that you will take as you bring your new ventures into being. It’s like a painting that emerges based on how you interact with, feel and agonise over your creations. You don’t just produce a venture; it comes out of you with pain and excitement. You don’t somehow pre-exist as an entrepreneur; you emerge as a result of your own unique, novel, idiosyncratic and experiential nature of creating a venture. Venture creation is a lived experience that, as it unfolds, forms you. Creating a sustainable enterprise involves three parallel things: the opportunity arises out of the shadows; the venture emerges out of your creativity and diligence; you yourself then emerge as entrepreneur. None are predetermined or fixed – they define and are defined by one another.30 Together, they make up your personal lived experience. This experiential view of the entrepreneur captures the time-dependent nature of entrepreneurship.31 It moves us past a more static ‘snapshot’ approach and encourages us to consider a dynamic, socially situated process that involves numerous actors and events. This makes us look at how the many activities addressed as a venture unfolds are experienced by different actors in different ways over different ages.32 Moreover, it helps us realise that venture creation actually soars above rational thought. It includes emotions, impulses and physiological responses as individuals react to a diverse, multifaceted and imposing array of activities, events and developments.33 Table 2.1 helps clarify the nature of entrepreneurial capabilities as they vary across the different stages of entrepreneurial activity. In the table, the stages of the business – nascent (preparing for business start-up), survival (hanging on) and growth (powering ahead) – can be compared with the entrepreneurial characteristics that are needed for success. Higher education and experience

Chapter 2: The entrepreneurial mind-set: cognition and career 53

(e.g. previous industry and management roles) help through all three stages. Planning is a strong influencer during the growth stage but does not play a significant part during nascent and survival stages of a venture. Risk propensity and opportunity propensity are apparent characteristics during the nascent stage. You will often hear that entrepreneurs have a great sense of self-efficacy. Bandura described self-efficacy as ‘the belief in one’s capabilities to organize and execute. . .’, a strong belief in your ability to succeed. He said these beliefs are the determinants of how people think, behave, and feel. Do you personally have a high sense of self-efficacy? Do you continue to believe in your ability after a failure? Does your mindset tell you that a failure was simply insufficient learning/training, preparation or effort?34 The table provides a guide to characteristics and capabilities that may fruitfully contribute to building an entrepreneurial career, and when they are most needed. TABLE 2.1

FIRM STAGES AND SIGNIFICANT ENTREPRENEURIAL CHARACTERISTICS/CAPABILITIES

FIRM STAGES

SIGNIFICANT ENTREPRENEURIAL CHARACTERISTICS/CAPABILITIES

Nascent (Defining and building the opportunity)

Risk propensity, Opportunity propensity, Entrepreneurial intentions, Higher education, Industry and/or market experience, Social capital, Balanced skills and an ability to analyse complex dynamics

Survival (Establishing the business and establishing market presence)

Self-efficacy and coping skills, Promotion capabilities, Entrepreneurial passion and intentions, Higher education, Related start-up experience, Social capital

Growth (Growing a profitable business and expanding market penetration)

Business planning, Growth intentions, Higher education, Related business management experience

Source: O’Connor, A., Corral De Zubielqui, G., Li, H. & Dissanayake, M. 2014, ‘Supporting entrepreneurship in high cost economies: What can governments do?’ in Roos, G. & Kennedy, N. (eds), Global Perspectives on Achieving Success in High and Low Cost Operating Environments, IGI Global, Hershey, USA, 290–392. Copyright, ª 2014 by IGI Global. Used by permission.

There are various pathways that can help you build your personal qualities and start your entrepreneurial career, such as finding or creating an opportunity, becoming involved in the family business, working with an employer to commence a new venture activity, seeking a franchise or buying an existing business to turn around or grow. These are discussed throughout the book, and are listed in the Preface as well.

THE ENTREPRENEURIAL LIFE CYCLE Read the following and answer the questions as they pertain to your own career. In trying to understand the life journey of an entrepreneur, Ian Hunter took an interesting approach and examined a specific period of time, 1880 to 1910, in New Zealand history. Hunter examined the lives of 130 colonial entrepreneurs active during that period to attempt to chart how an entrepreneur’s career developed in the context of colonial economic development. Hunter defined entrepreneurs as those who created a new economic enterprise; resurrected an enterprise; transformed a small business into a big business; or created a new enterprise from folding together previous businesses into an economically different form. Through this approach he isolated five stages of an entrepreneur’s life. •

ENTREPRENEURSHIP IN PRACTICE

Stage 1 was the preparation stage comprising the early years of an entrepreneur’s life that led to eventual business activities. The key characteristics of this stage included early work experience, acquisition of technical skill, the accumulation of capital, the formation of initial networks, the accumulation of trade and industry knowledge and the identification of a business opportunity. Transition to Stage 2 depended on recognising a subsequent new venture behaviour. cont.

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54 Part 1: Entrepreneurship in the twenty-first century cont.

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•

•

Stage 2 meant start-up operations, embarking on the new venture. The major hallmarks were: difficulties in market acceptance of new product or service innovation; limited capital; expansion through reinvestment of profits; increase in trade networks and industry knowledge; fostering trust in regards to suppliers, customers, staff; and risk of venture failure. The transition to the next stage was commonly marked by either a cessation of the first venture to develop further opportunities or a marked change in practice that signalled entry into the next stage. Stage 3, the exploration stage, saw the colonial entrepreneur starting further ventures. This stage was characterised by new initiatives, innovation, new partners, additional capital, commercial success and risk of failure. It was during this stage of the entrepreneur’s career that they would typically embark on the venture that would be the most successful of their career. They would enjoy heightened levels of knowledge, trust, networks and decision-making skill. Adopting a stable management practice with the most rewarding venture generally signalled the transition to Stage 4. Stage 4 was a time of focus and expansion; adopting particular growth strategies, the entrepreneur developed their enterprises. It was characterised by the entrepreneur concentrating on their most successful business venture to date; new capital often entered the business; the growth strategy of the entrepreneur became apparent; the entrepreneur began to invest in other ventures, with some diversifying their business interests, and family members entered the business. A major advance during this stage was the development of governance practices for the business as the entrepreneur prepared to transition to Stage 5. Stage 5 would mark the end of the colonial entrepreneur’s career. This period was characterised by the changeover to the next generation as leadership of the business often passed to the founder’s family members, with associated changes in company structure. Some ventures at this point were also marked by cessation. When there was no heir apparent, the death of the founder effectively brought the venture to an end as a family business. Stage 5 typically occurred when the founder was in their 60s, 70s or 80s.

The progress of entrepreneurs from one stage to the next was not guaranteed and at times some had to cease their undertaking to avoid further losses or worse, some went into bankruptcy. The life of an entrepreneur was not one of continuous economic success; failure could occur at any point in the life cycle. Moreover, Hunter showed that even in cases of complete economic failure, the entrepreneurs had a propensity to return to entrepreneurial activity and once again accumulate wealth, establishing a recovery into entrepreneurial activity. Answer the following questions: 1 2 3

You may not be in the colonial age, but what is the age you are presently in? Is it revolutionary, traditional, explosive, corrupt? What could Hunter mean by ‘folding together previous businesses into an economically different form’? Give some examples. Which stage are you in? Can you envision the next stage? Source: Adapted from Hunter, I. (2005). ‘Risk, persistence and focus: A life cycle of the entrepreneur.’ Australian Economic History Review, 45(3), 244–72. Published by John Wiley & Sons, Inc., ª 2005.

Chapter 2: The entrepreneurial mind-set: cognition and career 55

SUMMARY We started this chapter by looking at some demographic profiling of entrepreneurs from around the world and saw that most entrepreneurs are often older, falling within the 35–54 age group, and that more men than women are generally participating in entrepreneurial activity. In attempting to explain the entrepreneurial mind-set within individuals, this chapter presented the most common characteristics exhibited by successful entrepreneurs and introduced the concept of entrepreneurial cognition. Several studies have been conducted to determine the personal qualities and traits of successful entrepreneurs. Some of these were examined in the chapter: commitment, determination and perseverance; drive to achieve; opportunity orientation; initiative and responsibility; persistent problem solving; seeking feedback; internal locus of control; tolerance for ambiguity; calculated risk taking; integrity and reliability; tolerance for failure; high energy level; creativity and innovativeness; vision; independence; self-confidence and optimism; and team-building. Next, a review of the dark side of entrepreneurship revealed certain negative factors that can arise when entrepreneurs overextend their characteristics. We concluded the chapter by considering the entrepreneurial career and how some of the supportive characteristics of the entrepreneur vary across time as the venture develops from being an idea into the survival stage of a young business and then onward to being a growth-oriented venture. Entrepreneurship is a career with many twists and turns experienced by the entrepreneur and we explore further the pathways into an entrepreneurial career in Part 2.

KEY TERMS AND CONCEPTS calculated risk taking career risk dark side of entrepreneurship drive to achieve entrepreneurial career entrepreneurial capabilities entrepreneurial characteristics entrepreneurial cognition entrepreneurial mind entrepreneurial motivation

entrepreneurial stress external optimism family and social risk financial risk goal orientation necessity entrepreneurship need to achieve need to control networking

Review key terms with interactive flashcards

opportunity-driven entrepreneurship opportunity orientation psychic risk risk self-efficacy tolerance for ambiguity tolerance for failure vision

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4

5

What do we see when we look around the world at entrepreneurs? How can the differences among entrepreneurs in terms of age and gender be explained? Many people believe that entrepreneurs think differently. How can this be explained in terms of entrepreneurial cognition? Some of the characteristics attributed to entrepreneurs include persistent problem solving, continuous seeking of feedback and internal locus of control. What do these mean? Identify two high-profile entrepreneurs from your country and research their backgrounds. Using the characteristics of entrepreneurs outlined in this chapter as a reference, construct a character profile of each. How does your own profile compare to these? How do the following traits relate to entrepreneurs: desire to achieve, opportunity orientation, initiative and responsibility?

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6 7 8 9 10 11 12 13 14 15

Explain why entrepreneurs are not gamblers. How is opportunity orientation defined? Is it true that most successful entrepreneurs have failed at some point in their business careers? Explain. Explain why an entrepreneurial team is important for an entrepreneur. In what way is vision important to an entrepreneur? Self-confidence? Independence? Entrepreneurship has a dark side. What is meant by this statement? What are the four specific areas of risk that entrepreneurs face? Describe each. What are four causes of stress among entrepreneurs? How can an entrepreneur deal with each of them? Describe the factors associated with the entrepreneurial ego. What characteristics of entrepreneurs has research identified that specifically support the development of a venture at the nascent, survival and growth stages? 16 Identify and describe the major life-cycle transitions for a lifelong entrepreneurial career.

EXPERIENCING ENTREPRENEURSHIP Entrepreneurial self-assessment Are you the entrepreneurial type? Go to http://www.bdc.ca/EN/articles-tools/entrepreneur-toolkit/ business-assessments/Pages/self-assessment-test-your-entrepreneurial-potential.aspx and complete the questionnaire. Your overall score describes your profile compared to other entrepreneurs.

Experience this activity online

EXPERIENCING ENTREPRENEURSHIP Interviewing an entrepreneur Tips on how to conduct the interview You will conduct a formal interview with an entrepreneur. Find someone who is currently (in the past three years) starting a business, who owns at least 51 per cent of the business and has paid Experience this activity wages to someone other than him/herself. Be sure to get the person to commit to at least 45 online minutes. Record the date, place of interview and the person’s name. What is this person’s position and your relationship to him/her? The final section of the write-up should address how the findings of the interview apply or are meaningful to you. What did you learn or discover that has meaning for your own plans, for your own future? The interview must be approached rigorously, not casually. You should be prepared with the questions in advance. Rehearse them with a friend in a mock interview. Develop an efficient means of taking notes or capturing the key points of the entrepreneur. Establish a personal rapport (take the entrepreneur out to lunch!). Do not just deal with the superficial questions and answers. The key is to probe, to ask why, to delve beneath the surface. Try to cut through the propaganda. Be sure to examine the total effect of the venture on the person’s life. Here are some guides for questions.

The entrepreneur before starting the venture • • • • • •

What is your education background? What is your previous work experience (before starting the venture)? Did you have any role models when growing up? Did you do entrepreneurial things as a youth? When did you know you wanted to be an entrepreneur? Did you have parents who were entrepreneurial?

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The entrepreneur at the time he/she started the venture • • • • • • • • • •

What was your primary motivation for starting a business? What were the factors that led you to start the venture? What were your goals at the time you started the venture? What sort of beliefs did you have (for example, about employees, partners, debt, etc.)? Did you seek to establish a ‘lifestyle’ business, a ‘rapid growth’ business, or what? Did your growth orientation change over time? What sort of resources (not just financial) did you have when you started the venture? What sort of network did you have? Were there any especially creative things you did to come up with the needed resources? How concerned were you with control when starting the venture? Explore the entrepreneur’s need for control (of the venture, of people, of decision making). What was your risk orientation when you started the venture? Did you write a business plan? Did you feel prepared to start the venture at the time you started it? How long was a typical work day and work week when you first started your venture?

The entrepreneur as she/he grew the venture • • • • • • •

How have your goals and values changed since starting the venture? Did your risk orientation change as the venture grew? Did your need for control change as the venture grew? Did the typical work week change as the venture grew (in terms of how much time the venture required and in terms of how you allocated your time)? Did you make assumptions when you first started out that subsequently proved to be wrong? What sorts of insights were gained? What key mistakes did you make along the way? What were some of the key lessons learned (their greatest moment and their worst moment)? Were there some critical points in the development of the venture when the venture almost failed, or when you found yourself at a critical crossroads in terms of some vital decision or issue that had to be addressed in a certain way or the venture would have failed?

The entrepreneur today and tomorrow • • • • •

What would you do differently if you had it all to do over again? What key personal characteristics do you see in yourself that were especially critical for achieving success with this particular venture? What are your plans for the future in terms of the venture? What is your exit strategy or do you not have one? What advice, based on your own experience, do you have for a student interested in starting a venture today?35

CASE STUDIES CASE 2.1 Jane’s evaluation Paul Medwick is a commercial banker. In the past month, he has received loan applications from three entrepreneurs. All three have fledgling businesses with strong potential. However, Paul believes it is important to look at more than just the business itself; the individual also needs close scrutiny. The three entrepreneurs are: (1) Robin Wood, owner of a small delicatessen located in the heart of a thriving business district; (2) Richard Trumpe, owner of a 10-minute oil-change-andlube operation; and (3) Phil Hartack, owner of a bookshop that specialises in bestsellers and cookbooks. Paul has had the

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bank’s outside consultant, Professor Jane Jackson, interview each of the three entrepreneurs. Jane has done a lot of work with entrepreneurs and after a couple of hours of discussion can usually evaluate a person’s entrepreneurial qualities. In the past, Jane has recommended 87 people for loans, and only two of these ventures have failed. This success rate is much higher than that for commercial loans in general. Following is Jane’s evaluation of the three people she interviewed. ROBIN WOOD

RICHARD TRUMPE

PHIL HARTACK

Perseverance

H

M

M

Drive to achieve

M

H

M

Initiative

M

H

M

Persistent problem solving

M

M

H

Tolerance for ambiguity

L

M

H

Integrity and reliability

H

M

H

Tolerance for failure

H

H

H

Creativity and innovativeness

M

H

M

Self-confidence

H

H

H

Independence

H

H

H

CHARACTERISTIC

H ¼ High; M ¼ Medium; L ¼ Low.

QUESTIONS

1 2 3

Which of the three applicants do you think has the weakest entrepreneurial psychological profile? Explain your reasoning and how you think this profile could be detrimental to business success. To which applicant would you recommend that the bank lend money? (Assume that each has asked for a loan of $50 000.) Defend your answer. What advice would you give the entrepreneur with the weakest profile to increase their chances of future success?

CASE 2.2 The Cashew Case Part 1: Are you nuts? (Note: This is Part 1 of a three-part case featured in Chapters 2, 10 and 11) Mrs Rosario Villaviray is a cashew grower and community leader in the village of Duale, Limay in the Philippines. Mrs Villaviray, owns a 3.5 ha orchard of cashew trees intercropped with other fruit trees such as mango, guava, santol and jackfruit. In Limay, the cashew growing area is about 71 ha producing a total of 84 tonnes of cashew nuts annually. Cashew farmers in the area individually sell the raw nuts to local traders who visit their villages. They are generally price-takers as traders usually dictate the price of the cashew nuts. During peak harvest season, there is an oversupply of cashew nuts in other major supply areas such as the province of Palawan, so much so that the traders don’t need to travel to Bataan during this period to buy the farmers’ produce. As a consequence, cashew farmers experience difficulty in marketing their produce. For lack of market, some farmers out of desperation have even started cutting down their cashew trees. Meanwhile, there is something also growing on the tree with value the farmers don’t well understand. It’s cashew apple, the tree’s ‘fruit’ that can be processed into a sweet drink or distilled into liqueur. Farmers don’t understand its potential economic value and just leave the apples in the field to rot, while some collect and use them as feed for cattle and pigs.

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Chapter 2: The entrepreneurial mind-set: cognition and career 59

Mrs Villaviray did some homework to find out the full extent to which she could utilise the cashew tree to produce an economic return. She found out that the cashew tree is mostly cultivated for its nut, but the cashew apple also could be valuable. Both the nut and the apple have economic value as food and for industrial use. The cashew nut consists of the kernel and the shell. The kernel is roasted whole or split and consumed not only as a health food but also as a luxury dessert food. Local food manufacturers use the dried or roasted cashew kernels as ingredients in the manufacture of ice cream, confectioneries, and hardener for chocolates and pastries. She also discovered the amazing fact that the cashew nut’s shell contains a natural resin known as cashew nut shell liquid (CNSL), which is used as a raw material for industrial manufacture, such as in brake linings, industrial rubber, varnishes, paints, adhesives, anti-corrosives and electrical insulations. With a strong entrepreneurial spirit, Mrs Villaviray saw the vast income potential of value-adding to her farming business by further processing the cashew nut and the cashew apple. She approached the Bureau of Postharvest Research and Extension (BPRE) for technical assistance to develop a small-scale cashew fruit processing enterprise. As project cooperator, her stake or equity in the project could include the processing space and shed, labour, working capital and management of the enterprise. BPRE, as development facilitator, agreed to provide the processing equipment and facilities. The approach by Mrs Villaviray to the BPRE was timely because BPRE was about to embark on a participatory pilot project on a small-scale cashew fruit processing enterprise. [To be continued in Chapters 10 and 11.] Source: Linking Farmers to Market: Some Success Stories from Asia-Pacific Region, Asia-Pacific Association of Agricultural Research Institutions, FAO Regional Office for Asia and the Pacific, Bangkok, Thailand, May 2008. Copyright ª 2008 by APAARI.

QUESTIONS

1 2

3

What aspects of this case demonstrate the entrepreneurial mind and behaviour of Mrs Villaviray? What aspects of entrepreneurial mind and behaviour would make Mrs Villaviray think to approach the BPRE and not the bank first for assistance and what is it about Mrs Villaviray that would give the BPRE confidence to agree to assist and back Mrs Villaviray’s project? Should Mrs Villaviray have found out more information before approaching the BPRE and does she know enough to enter into this venture? How does this behaviour match with the characteristics of an entrepreneur?

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. ambiguity cognition entrepreneurial behaviour

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failure financial risk networking

risk taking stress

60 Part 1: Entrepreneurship in the twenty-first century

1

2

3

In the article ‘Would future entrepreneurs be better served by avoiding university business education? Examining the effect of higher education on business student thinking style’, in the Journal of Entrepreneurial Education, 15/S1 (2012) the authors have examined the idea that successful entrepreneurs drop out of higher education. Locate the article and discuss their findings in the context of your higher education experience. An entrepreneur is often defined in terms of character traits. While these traits are varied and many, there is no escaping the fact that your traits define who you are. Take a look at the article by Doug Arms (2014), ‘Build your personal brand in four weeks’ published in Strategic Finance, 96(6), p. 41 and take the challenge to define and build your own brand to distinguish who you are and what you stand for among the entrepreneurial crowd. Using Advanced Search/Person – About ‘steve jobs’/News, find information and articles and start a discussion on Apple’s Steve Jobs, particularly his entrepreneurial traits. Did he have a dark side? How did he motivate others?

ENDNOTES 1 Smilor, R. (2001). Daring visionaries: How entrepreneurs build companies, inspire allegiance, and create wealth. Avon, MA: Adams Media Corporation. 2 See Baron, R. A. (1998). Cognitive mechanisms in entrepreneurship: Why and when entrepreneurs think differently than other people. Journal of Business Venturing, April, 275–94; and Krueger, N. F. (2007). What lies beneath: The experiential essence of entrepreneurial thinking. Entrepreneurship Theory and Practice, 31(1), 123–38. 3 Singer, S., Amoro´s, J. E. & Arreola, D. M. (2015). Global Entrepreneurship Monitor 2014 Global Report. Wellesley, MA: Babson College. Available at http:// www.gemconsortium.org/docs/3616/gem2014-global-report. 4 Kelley, D. J., Singer, S. & Herrington, M. (2012). 2011 Global Report, Global Entrepreneurship Monitor, available at http://www.gemconsortium.org/docs/ 2409/gem-2011-global-report. 5 Singer, S., Amoro´s, J. E. & Arreola, D. M. (2015). Global Entrepreneurship Monitor 2014 Global Report. Wellesley, MA: Babson College. Available at http:// www.gemconsortium.org/docs/3616/gem2014-global-report. 6 See Schwab, K. (ed.). (2010). The global competitiveness report 2010–2011. Geneva: World Economic Forum. 7 Peterson, H. (2014). Gen Y is old news – Here’s everything you should know about Generation Z. Business Insider Australia, 26 June 2014, http:// www.businessinsider.com.au/generationz-spending-habits-2014-6. 8 See, for example, Bygrave, W. D. & Hofer, C. W. (1991). Theorising about entrepreneurship. Entrepreneurship Theory and Practice, Winter, 12–22; Bull, I. & Willard, G. E. (1993). Towards a theory of entrepreneurship. Journal of

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Business Venturing, 8, May, 183–96; Gartner, W. B. (2001). Is there an elephant in entrepreneurship? Blind assumptions in theory development. Entrepreneurship Theory and Practice, 25(4), 27–39; and McMullen, J. S. & Shepherd, D. A. (2006). Entrepreneurial action and the role of uncertainty in the theory of the entrepreneur. Academy of Management Review, 31(1), 132–52. 9 Hancock, G. (2014). For love or money? A phenomenological investigation into within-family finance for the purpose of starting a new enterprise. Unpublished thesis presented at the University of Adelaide. 10 The Economist (2014). Testing, testing. 18 January. 11 Bolton, B. & Thompson, J. (2004). Entrepreneurs: Talent, temperament, technique (2nd edn). Oxford: ButterworthHeinemann, 5. 12 Cardon, M. S., Zietsma, C., Saparito, P., Matheme B. P. & Davis, C. (2005). A tale of passion, new insights into entrepreneurship from a parenthood metaphor. Journal of Business Venturing, 20(1), January, 23–45. 13 Mitchell, R. K., Busenitz, L., Lant, T., McDougall, P. P. Morse, E. A. & Smith, J. B. (2002). Toward a theory of entrepreneurial cognition: rethinking the people side of entrepreneurship research. Entrepreneurship Theory and Practice 27(2), 93–105. 14 Shefsky, L. E. (1994). Entrepreneurs are made not born. New York: McGrawHill. 15 See Gartner, W. B. (1989). Some suggestions for research on entrepreneurial traits and characteristics. Entrepreneurship Theory and Practice, Fall, 27–38. 16 Holland, D. V. & Shepherd, D. A. (2013). Deciding to persist: Adversity,

values, and entrepreneurs’ decision policies. Entrepreneurship Theory & Practice, 37(2), 331–58. 17 McClelland, D. C. (1961). The achieving society. New York: Van Nostrand; and McClelland, D. C. (1962). Business drive and national achievement. Harvard Business Review, July/August, 99–112. 18 Jennings, J. & Haughton, L. (2000). It’s not the big that eat the small … It’s the fast that eat the slow: How to use speed as a competitive tool in business. Darby, PA: Diane Pub Co. 19 Cardon, M. S., Wincent, J., Singh, J. & Drnovsek, M. (2009). The nature and experience of entrepreneurial passion. Academy of Management Review, 34(3), 511–32; and M. S. Cardon (2008). Is passion contagious? The transference of entrepreneurial emotion to employees. Human Resource Management Review, 18(2), 77–86. 20 Zhang, Y. (2012). Unlocking founding team prior shared experience: A transactive memory system perspective. Journal of Business Venturing, 27, 577–591. 21 For some articles on entrepreneurial characteristics, see McGrath, R. G., MacMillan, I. C. & Scheinberg, S. (1992). Elitists, risk takers, and rugged individualists? An exploratory analysis of cultural differences between entrepreneurs and non-entrepreneurs. Journal of Business Venturing, March, 115–36; Kickul, J. & Gundry, L. K. (2002). Prospecting for strategic advantage: The proactive entrepreneurial personality and small firm innovation. Journal of Small Business Management, 40(2), 85–97; Levesque, M. & Minniti, M. (2006). The effect of aging in the dynamics of new venture creation. Journal of Business Venturing, 21(2), 177–94; Brigham, K. H.,

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DeCastro, J. O. &. Shepherd, D. A. (2007). A person-organisation fit model of owners-managers’ cognitive style and organisation demands. Entrepreneurship Theory and Practice, 31(1), 29–51. 22 See Neck, H. M. & Greene, P. G. (2011). Entrepreneurship education: Known worlds and new frontiers. Journal of Small Business Management, 49(1), 55–70. 23 Manfred F. R. & de Vries, K. (1985). The dark side of entrepreneurship. Harvard Business Review, November/ December, 160–7; see also Zahra, S. A., Yavuz, R. I. & Ucbasearan, D. (2006). How much do you trust me? The dark side of relational trust in new business creation in established companies. Entrepreneurship Theory and Practice, 30(2), 541–59. 24 Bolton and Thompson, Entrepreneurs, 173–97. 25 Liles, P. R. (1974). New business ventures and the entrepreneur. Homewood, IL: Irwin, 14–15; see also Janney, J. J. & Dess, G. G. (2006). The risk concept for entrepreneurs reconsidered: New challenges to the conventional wisdom. Journal of Business Venturing, 21(3), 385–400. 26 Akande, A. (1992). Coping with entrepreneurial stress, Leadership &

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Organisation Development Journal, 13(2), 27–32; Buttner, E. H. (1992). Entrepreneurial stress: Is it hazardous to your health? Journal of Managerial Issues, Summer, 223–40. 27 Buttner, Entrepreneurial stress; see also Rabin, M. A. (1996). Stress, strain and their moderators: An empirical comparison of entrepreneurs and managers. Journal of Small Business Management, January, 46–58. 28 Akande, Coping with entrepreneurial stress. 29 de Vries, The dark side of entrepreneurship. 30 Schindehutte, M., Morris, M. H. & Kuratko, D. F. (2008). Framing entrepreneurial experience: The journey as the destination. Working manuscript, June. 31 O’Connor, A., Corral De Zubielqui, G., Li, H. & Dissanayake, M. (2014). Supporting entrepreneurship in high cost economies: What can governments do?’ in Roos, G. & Kennedy, N. (eds), Global perspectives on achieving success in high and low cost operating environments, Hershey, USA: IGI Global, 290–392. 32 Politis, D. (2005). The process of entrepreneurial learning: A conceptual framework. Entrepreneurship Theory and Practice, 29(4), 399–424.

33 Davidsson, P. (2004). A general theory of entrepreneurship: The individualopportunity nexus. International Small Business Journal, 22(2), 206–19; and Berglund, H. (2007). Entrepreneurship and phenomenology: Researching entrepreneurship as lived experience. In J. Ulhøi & H. Neergaard (eds), Handbook of qualitative research methods in entrepreneurship. London: Edward Elgar, 75–96. 34 Bandura, A. (1977). Self-efficacy: toward a unifying theory of behavioral change. Psychological review, 84(2), 191. O’Connor, A., Corral De Zubielqui, G., Li, H. & Dissanayake, M. (2014). Supporting entrepreneurship in high cost economies: What can governments do? 35 Morris, M. The business model, marketing inventions, the entrepreneurial audit and the interview of an entrepreneur as learning vehicles. Presentation at ‘Experiential Classroom: Lifelong Learning for Entrepreneurship Education Professions’, Syracuse University: September 2004. For further information on this yearly program, see http://entrepreneurship.okstate.edu/ classroom.

» CHAPTER THREE ENTREPRENEURSHIP AND SUSTAINABLE DEVELOPMENT CHAPTER OBJECTIVES

1 What is the business case for eliminating life on Earth? Interface CEO, Ray Anderson The trouble with our times is that the future is not what it used to be . . . ´ry French poet and aviator Paul Vale When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.

To appreciate the role of entrepreneurship in challenging and urgent times

2 To classify the types of climate change effects on entrepreneurs as well as the opportunities that arise within the Asia–Pacific context 3 To review important concepts in climate change economics that impact on entrepreneurial activity 4 To appreciate the various emerging frameworks in entrepreneurial ecology

Alexander Graham Bell We can’t solve problems by using the same kind of thinking we used when we created them. Albert Einstein When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity. John F. Kennedy

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Chapter 3: Entrepreneurship and sustainable development 63

ENTREPRENEURSHIP AS IF THE PLANET MATTERED There’s no avoiding it. Our planet is suffering in many ways, including: • climate change due to the increase in greenhouse gases • fluorocarbons depleting the ozone layer • acid rain and air pollutants • shortages of freshwater resources • overfishing, habitat destruction and pollution in the marine environment • crop loss and grazing depletion due to desertification and erosion • cutting down the world’s tropical forests, leading to erosion and flooding • mass extinction of species and the associated loss of genetic resources • threats to human health from exposures to chemicals in production processes, products and consumption activities • rapid population growth and migration, burgeoning mega-cities, and ecological refugees. Why does all of this matter to entrepreneurs? Look at Figure 3.1, which shows air pollution high above Indonesia. Across the vast archipelago, swathes of rainforest are cut down and burned off by small- and large-scale entrepreneurs to make way for palm oil production. Satellites have identified plumes of smoke drifting over the archipelago’s oil palm plantations and rainforests, sweeping towards Singapore, Malaysia and deep into Cambodia, Laos and Thailand. At ground level, SouthEast Asian cities choke for weeks during Indonesia’s burning season.1 The pursuit of economic growth is at the expense of the environment. Thousands of Indonesians are employed and many entrepreneurial families are coming out of poverty because of the enterprise. However, the result is an environmental disaster. This kind of deforestation accounts globally for about 12 per cent of total man-made greenhouse gas emissions, about the same as transport (13 per cent) and agriculture (12 per cent).2 How bad is it? Indonesia is home to only 3 per cent of the world’s forests. Yet

On CourseMate Express read about the true price of palm oil. Entrepreneurs are barking up the wrong tree!

FIGURE 3.1 AIR POLLUTION OVER SOUTH-EAST ASIA DUE TO INDONESIAN RAINFOREST FIRES

Source: NASA.

64 Part 1: Entrepreneurship in the twenty-first century

deforestation by small-scale farming entrepreneurs represents over a third of the total global carbon emissions from deforestation and land degradation.3 The fact is that around the world, economic growth and entrepreneurial activity are inextricably linked to global warming. Human well-being on Earth is quickly slipping away, unless we act now. We have been wasteful of our time and now is the last chance to preserve life on Earth as we know it – the only option is innovation and enterprise to get it right. Who can help save us? Entrepreneurs who understand the new climate reality – and are willing to invest in preparedness and risk management – are best equipped to seize opportunities. This book is about ‘entrepreneurship as if the planet mattered’. This chapter has a broad scope. It seeks to introduce the approaching climate change crisis that most readers will certainly be familiar with. But its unique contribution is to combine this information with the field of entrepreneurship in a way that will hasten entrepreneurs’ involvement in solving these very pressing problems for ourselves and our descendants.

ENTREPRENEURSHIP IN TIMES OF CRISIS As President Kennedy once said (see epigraph at beginning of this chapter), crisis means both danger and opportunity. Some of the most innovative ideas have emerged during times of crisis. Just because the world is experiencing a crisis, doesn’t mean that the spirit of innovation will. If the most famous theoretician of entrepreneurship, Joseph Schumpeter, were alive today, he would say that crises such as the GFC and climate change ‘clean the slate through creative destruction and create lasting, positive change’. Entrepreneurial organisations are the engines of job growth and create more jobs than large established organisations.4 In part, this is due to the fact that breakthrough inventions are contributed disproportionately by independent inventors and entrepreneurs.5 Indeed, rather than being interrupted by the global financial crisis (GFC), there was an increase in sustainability related programs as part of economic reform agendas. Consider these headlines: ‘Stock market down 50 per cent’, ‘Banks in trouble and curtail lending’, ‘Widespread bankruptcies predicted’, ‘Unemployment rising fast’. It all sounds so familiar, but those headlines aren’t from the recent GFC. They are from 1974!6 Yet opportunity definitely emerged from that crisis year as people with creative solutions and the skill to implement them stepped forward and developed new ways to access capital, combine resources and commercialise their innovations. Over the two years following 1974, the markets recovered strongly. That skill in finding new opportunities when things look bleak is a characteristic of an entrepreneur. It is no surprise that some of the highest rates of entrepreneurial activity occur during financial crisis and economic dislocation caused by natural catastrophes. Crises seem to spur innovation, not stifle it; for example: • During the Great Depression, General Electric introduced the fluorescent light bulb, which has twice the lifespan of incandescent lighting but uses half the power. • Ray Kroc opened the first McDonald’s during the Eisenhower recession. • During the Vietnam War and the 1973 Oil Crisis, Bill Gates and Paul Allen formed Microsoft. • During the Reagan recession of the early 1980s, Microsoft introduced Word. • During the First Gulf War, the World Wide Web and Apple PowerBook debuted. • When the dotcoms crashed and the 9/11 attacks took place, the iPod came onto the market. • During the GFC of 2007–09, Facebook and Twitter grew to become global corporate giants. Kauffman Foundation says that more than 50 per cent of the fast-growing and largest companies of today were founded during times of crisis. Launching a new company during global upheavals does not actually put companies at a disadvantage as many might suspect. In fact, at the height of the crisis in 2008, more low-overhead, low-revenue businesses were launched than in previous

Chapter 3: Entrepreneurship and sustainable development 65

years.7 The rate of entrepreneurship actually went up during the GFC. As amazing as it may sound, entrepreneurship increases during civil wars, economic dislocations and natural disasters!8 In retrospect, 18 of the 30 companies that make up the Dow Jones Industrial Average were launched in recessions or in bear stock markets. As Wadhwa has pointed out, ‘the pioneers who launched these firms (and others) during the darkest of times [had] less competition, lower costs, ease of recruiting employees, and less pressure to expand …’.9 When recession rears its ugly head to sap the spirit of an economy, it is entrepreneurship (often with government stimulus) that infuses vigour back into the economy and society. That’s what economist Carl Schramm has observed on the implications of growth and recovery from recession in a business cycle.10 Schramm lists four reasons for this: (1) the explosion of creative impulse that leads to innovations, (2) scarcity in available options, (3) lower operating costs and (4) severely hit behemoths (large corporations). Could this also be true for entrepreneurs within the crisis of climate change? For an economist of the entrepreneurial economy, downturns can act as a good ‘cold shower for the economic system’, releasing capital and labour from dying sectors and allowing newcomers to recombine them in imaginative new ways.11 Economic downturns can have positive effects. They can force companies to increase their efficiency, cut waste and strive to do things in smarter ways. In such times innovation is the single most important condition for transforming crisis into an opportunity.12 Now we are engaged in a great climate war, testing whether the human race can long endure as we know it. Although entrepreneurs must take a share of the responsibility for global warming, they are also agents of change who may help to turn the situation around. Entrepreneurs respond best to business logic, and lately this logic has been music to our ears: ‘The benefits of strong, early action on climate change outweigh the costs’. These words appeared in bold in the Executive Summary of the 2007 Stern Review on the Economics of Climate Change. The Stern Review, by economist Nicholas Stern of the London School of Economics, stresses that climate change is the greatest and widest-ranging market failure ever seen.13 ‘Fixing climate now [2007] would cost about 1 per cent of Gross Domestic Product (GDP) per year. Doing nothing, say many economic models, would cost the world the loss of 5 per cent GDP per year – now and forever’, says Professor Stern. That 5 per cent figure was actually a best-case scenario for doing nothing: if all the risk factors are taken into account and they hit at once, then the figure could be as high as 20 per cent. One-fifth of global GDP would disappear now and forever. These conclusions, and these figures, are what will be most remembered about the Stern Report. Updating this in 2014, Stern and his colleagues in the Global Commission on the Economy and Climate published ‘Better Growth, Better Climate: The New Climate Economy Report’. The latest thinking is that governments and businesses can now improve economic growth by reducing carbon emissions. Rapid technological innovation and new investment in infrastructure are making it possible today to tackle climate change at the same time as improving economic performance. There is no need to choose between fighting climate change or growing the world’s economy.14

FINDING A PATHWAY TO YOUR CLIMATE-RESILIENT FUTURE This logic shows that entrepreneurs can seize the opportunity towards climate-resilient pathways. The world is threatened by multiple stressors that affect the earth’s resilience (the ability to recover readily). These stressors are all challenges and opportunity for the type of entrepreneurial personality who spots unfilled needs and gaps in the market. These stressors are the ‘pains’ that entrepreneurs look for and provide solutions to. They include climate change and variability, changes in land use, remediation of natural ecosystems, alleviation of poverty and inequality, and changes in cultural factors. What entrepreneurs understand, that others do not, is the opportunity space.15 These are decision points and pathways that can lead to possible futures and venture ideas that have different levels of risk and

66 Part 1: Entrepreneurship in the twenty-first century

resilience. Entrepreneurs take advantage of these pathways and routes to market where other people fail to act, or they fail to manage risks related to the planet’s evolution. Entrepreneurs are good at choosing pathways to profit and prosperity, but some of them (the red ones in Figure 3.2) can lead to lower resilience (indeed they can become irreversible) while others (the green ones) can lead to a more resilient world through adaptive learning and effective adaptation and mitigation (refer to Figure 3.2). FIGURE 3.2

ENTREPRENEURIAL OPPORTUNITY SPACE AND CLIMATE-RESILIENT PATHWAYS

a) Our world

b) Opportunity space

c) Possible futures

High resilience

Low risk

Low resilience

High risk

e) Climate-resilient pathways Multiple stressors including climate change

d) Decision points Biophysical stressors Resilience space Social stressors f) Pathways that lower resilience

Source: Intergovernmental Panel on Climate Change (IPCC) WGII AR5 Summary for Policymakers, WGII AR5 Phase I Report Launch 1, Climate Change 2014: Impacts, Adaptation, and Vulnerability Summary For Policymakers. Published by IPCC, ª 2014.

Chapter 3: Entrepreneurship and sustainable development 67

Let’s examine this important figure. The world is threatened by social and biophysical stressors that affect the ability of our world (a) to recover readily and to be resilient (refer to Figure 3.2). In (a), you will see that biophysical stressors (in red) such as climate change and degradation of ecosystems that push in from the outside, while the social stressors (in yellow) such as cultural factors, population increase, poverty and inequality push out from the inside, thus increasing or decreasing the amount of resilience space (in green). Entrepreneurs love these kinds of opportunity spaces that you see in (b).16 However, within these opportunity spaces, entrepreneurs encounter multiple decision points (d) where they either can act or fail to act – manage or fail to manage – risks related to climate change. They can put us either onto climate-resilient pathways (e) or onto pathways that lower our ability to survive (f), thus leading to possible futures (c) with differing levels of risk and resilience. In this view, entrepreneurs should choose pathways that help increase the resilience space (green arrows) and achieve higher resilience and lower risk, rather than pathways that lead to lower resilience and higher risk (red arrows), where the resilience space is very small. Entrepreneurs can reduce risks through adaptive learning, increasing scientific knowledge, effective adaptation and mitigation measures, and other choices. Or they can do the opposite (well demonstrated in the past) through insufficient mitigation, mal-adaptation, failure to learn and use knowledge, and other actions that lower resilience. The tragedy is that these kinds of pathways (descending red arrows) may well be irreversible in terms of possible futures.

CLIMATE CHANGE EFFECTS FOR ENTREPRENEURS THE SITUATION IN THE ASIA–PACIFIC Climate change means human activity that alters the composition of the global atmosphere.17 Climate change is already having an impact in the Asia–Pacific region. As it intensifies, climate change will cause increased disruption and instability, affecting millions of people. Already Asia’s mega-cities and densely populated areas along the Pacific and Indian Ocean coastlines are threatened by the rise of sea levels and surface temperatures, intensification of cyclones, extreme waves and storm surges, altered precipitation and runoff, and ocean acidification.18 The combined effects of accelerating climate change, population growth and land-use pressures are likely to significantly damage Australasian and Asian ecosystems that comprise some of the richest biodiversity on Earth. Figure 3.3 describes the climate change impacts already reported in Asia and Australasia. This includes extreme precipitation, damaging cyclones, sea level rise, extreme temperatures, drought and acidification of the ocean.

GLOBAL WARMING EFFECTS ON THE ECONOMY Kiribati (pronounced kir-i-bass) is so spread out that it is the ‘only country in all four hemispheres’. One of the world’s poorest countries, it is an island republic with 100 000 people on atolls rising only a few metres above sea level and relies on fish and copra (dried coconut) exports. The United Nations Intergovernmental Panel on Climate Change predicts that by 2100, sea levels will rise such that the nation’s arable land will become salinated and will be largely submerged. According to a World Bank report, the capital of Kiribati, Tarawa – where nearly half the population lives – will be 25–54 per cent inundated by water in the south and 55–80 per cent in the north by mid-twenty-first-century unless there is significant adaptation. Factor in what this means for poisoning of groundwater, destruction of limited arable land and spread of disease, and you have an unlivable national capital.

ENTREPRENEURIAL EDGE

cont.

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68 Part 1: Entrepreneurship in the twenty-first century cont.

Kiribati’s response to climate change is focused on adaptation. Its adaptation program, backed in part by Australian development aid, is carrying out a scientific risk assessment for Tarawa. Kautuna Kaitara, national director of the Kiribati Adaptation Program, says the country’s airstrip will be slowly ‘eaten away’ and water supply spoiled unless there is swift action. In the meantime, locals are forced to take things into their own hands. Albert Lentau has lived on the water’s edge in Abarao village since 1982. He has continually had to rebuild his sea wall, and more. Mr Lentau is no fool – his re-built house is on makeshift stilts – but the water is lapping at his door before high tide, and he often has to roll large boulders into the water in a hopeless attempt to prevent it from returning. Many villagers have little or no understanding of climate change, but say they know they are witnessing a shift: increasingly intrusive seas, as well as stronger and less predictable winds and more intense heat. ‘The average i-Kiribati [Kiribati inhabitant] certainly thinks it’s getting hotter,’ says Emil Shutz, a former government minister who now runs tours for the country’s few recreational visitors. ‘Ten years ago they could fish all day, but not any more – it is just too hot.’ There are parts of Kiribati where you can’t see the water, most notably in the southern Tarawa hub of Betio, but the threat of climate change is constantly there. The first thing you see when you land are the sandbags that try, and fail, to stop spring tides from flooding the only airstrip. If you are forced to go to hospital, you may get your feet wet. It is regularly inundated. Question 1

Review the tables and figures in this chapter. What opportunities might exist for entrepreneurs in the Pacific island nation of Kiribati? Source: Adapted from Office of the President, Republic of Kiribati, ‘Climate change in Kiribati’, http://www.climate.gov.ki/case-studies/tarawa.

Entrepreneurs need to appreciate the five basic problems associated with climate change: population, water, biodiversity, food and energy.

POPULATION At the dawn of agriculture, about 8000 BCE and only 10 000 years ago, the population of the world was approximately 5 million, about the size of today’s Singapore but spread around the globe. In the seventeenth century, only five hundred years ago, there were only half a billion people on Earth, about the size of the United States and Brazil combined. A tremendous change has occurred since the Industrial Revolution: while it had taken all of human history until around 1800 for the world population to reach one billion, the second billion was achieved in only 130 years (1930), the third billion in less than 30 years (1959), the fourth billion in 15 years (1974) and the fifth billion in only 13 years (1987).19 As of 2015, the world population is about 7.3 billion20 (see Figure 3.4). Each year, the population of a country the size of Egypt or Iran is added to the world’s population! Ninety-five per cent of these new people live in developing regions, especially in Africa and Asia. China and India in 2015 have together about 2.6 billion people.21 There are some interesting dynamics when one compares population to entrepreneurial activity. Populous countries have high rates of entrepreneurial activity (see Table 3.1). But many of the entrepreneurs who launch businesses in these countries are called necessity entrepreneurs who launch businesses because they have no other alternative.

Chapter 3: Entrepreneurship and sustainable development 69

FIGURE 3.3

OBSERVED IMPACTS ATTRIBUTED TO CLIMATE CHANGE IN ASIA AND AUSTRALASIA

Climate-related drivers of impacts

Level of risk and potential for adaptation Potential for additional adaptation to reduce risk O

Warming Extreme Drying Extreme Precipitation trend temperature trend precipitation

Snow Damaging cover cyclone

Sea level

C

O

O

C

O

Ocean Carbon dioxide acidification fertilisation

Risk level with high adaptation

Risk level with current adaptation

Asia Key risk

Adaptation issues and prospects

Increased riverine, coastal, and urban flooding leading to widespread damage to infrastructure, livelihoods, and settlements in Asia (medium confidence)

Increased risk of heat-related mortality (high confidence)

Climatic drivers

• Exposure reduction via structural and non-structural measures, effective land-use planning, and selective relocation • Reduction in the vulnerability of lifeline infrastructure and services (e.g., water, energy, waste management, food, biomass, mobility, local ecosystems, telecommunications) • Construction of monitoring and early warning systems: measures to identify exposed areas, assist vulnerable areas and households, and diversify livelihoods • Economic diversification

Timeframe

Risk and potential for adaptation Very low

Medium

Very high

Very low

Medium

Very high

Very low

Medium

Very high

Present Near-term (2030-2040) Long-term 2°C (2080-2100) 4°C

• Heat health warning systems • Urban planning to reduce heat islands: improvement of the built environment; development of sustainable cities • New work practices to avoid heat stress among outdoor workers

Present Near-term (2030-2040) Long-term 2°C (2080-2100) 4°C

Increased risk of drought-related water and food shortage causing malnutrition (high confidence)

• Disaster preparedness including early-warning systems and local coping strategies • Adaptive/integrated water resource management • Water infrastructure and reservoir development • Diversification of water sources including water re-use • More efficient use of water (e.g., improved agricultural practices, irrigation management, and resilient agriculture)

Present Near-term (2030-2040) Long-term 2°C (2080-2100) 4°C

Australasia Key risk

Adaptation issues and prospects

Significant change in community composition and structure of coral reef systems in Australia (high confidence)

Increased frequency and intensity of flood damage to infrastructure and settlements in Australia and New Zealand (high confidence)

• Ability of corals to adapt naturally appears limited and insufficient to offset the detrimental effects of rising temperatures and acidification. • Other options are mostly limited to reducing other stresses (water quality, tourism, fishing) and early warning systems; direct interventions such as assisted colonisation and shading have been proposed but remaing untested at scale.

• Significant adaptation deficit in some regions to current flood risk • Effective adaptation includes land-use controls and relocation as well as protection and accommodation of increased risk to ensure flexibility.

Climatic drivers

Time frame

Risk and potential for adaptation Very low

Medium

Very high

Very low

Medium

Very high

Very low

Medium

Very high

Present Near-term (2030-2040) O

C

O

Long-term 2°C (2080-2100) 4°C

Present Near-term (2030-2040) Long-term 2°C (2080-2100) 4°C

Increasing risks to coastal infrastructure and low-lying ecosystems in Australia and New Zealand, with widespresd damage towards the upper end of projected sea-level-rise ranges (high confidence)

• Adaptation deficit in some locations to current coastal erosion and flood risk. Successive building and protection cycles constrain flexible responses. • Effective adaptation includes land-use controls and ultimately relocation as well as protection and accommodation.

Present Near-term (2030-2040) Long-term 2°C (2080-2100) 4°C

Source: Intergovernmental Panel on Climate Change (IPCC), WGII AR5 Summary for Policymakers, WGII AR5 Phase I Report Launch 1, Climate Change 2014: Impacts, Adaptation, and Vulnerability Summary For Policymakers. Published by IPCC, ª 2014.

70 Part 1: Entrepreneurship in the twenty-first century

Billions

FIGURE 3.4 WORLD POPULATION DEVELOPMENT, 1750 TO 2050

Today

10

Billions 10

8

8

6

6

4

4

3

3

2

2

1

1 0 1750

0 1800

1850

1900

1950

2000

2050

Developing countries Industrialised countries Source: ‘World population development’ by Philippe Rekacewicz, UNEP/GRID-Arendal. Copyright ª 2005 by GRID-Arendal. Used by permission. TABLE 3.1 COUNTRY

Thailand

ASIA-PACIFIC – POPULOUS AND ENTREPRENEURIAL POPULATION (2013)

ENTREPRENEURS, PER CENT OF ADULTS (GEM REPORT)

GEM DATA YEAR

67 448 120

23.3

(2014)

105 720 644

18.4

(2014)

1 349 585 838

15.5

(2014)

Vietnam

92 477 857

15.3

(2014)

Indonesia

251 160 124

14.2

(2014)

United States

318 892 103

13.8

(2014)

Australia

22 507 617

13.1

(2014)

Canada

34 834 841

13.0

(2014)

Bangladesh

163 654 860

12.8

(2011)

Pakistan

193 238 868

12.0

(2012)

5 567 301

11.0

(2014)

Taiwan

23 359 928

8.5

(2014)

Korea, South

48 955 203

7.0

(2012)

Malaysia

30 073 353

5.9

(2014)

Russia

142 470 272

4.7

(2014)

Japan

127 253 075

3.8

(2014)

1 220 800 359

2.6

(2014)

Philippines China

Singapore

India

Source: Adapted from ‘CIA Factbook’, Central Intelligence Agency; and GEM Consortium, Global Entrepreneurship Research Association. Note: New Zealand was not included because it has not carried out a GEM survey since 2005. At that time it had the highest rate in the OECD.

Chapter 3: Entrepreneurship and sustainable development 71

Opportunity in crisis Where most people see chaos, entrepreneurs see ‘Eight Billion Business Opportunities’. This is especially true when we look at population problems.22 Here are some examples. • Entrepreneurial opportunities due to overpopulation. Population pressures have opened up a wide variety of opportunities for social and business entrepreneurs. Solutions are needed for (to name just a few): – finding fresh drinking water – tackling waste management – tackling air and water pollution and soil contamination – fighting infectious diseases such as HIV/AIDS, polio and malaria – combating unemployment and crime rates – improving food varieties – finding renewable energy sources – introducing family planning – providing universal education – promoting non-polluting urban and long-distance transportation. • Opportunities arising from the youthful population. Here youth market opportunities are seemingly endless and are perfect for small- and medium-sized overseas suppliers. Some of these opportunities are in these fields: – social internet – music – aftermarket support – sport and fitness – head-hunters (recruiters) and freelancer agents – fashion and accessories – cheap cars – environmentally friendly products – interactive media and gaming – electronic toys – creative and educational products – personal communications devices. • Opportunities arising from the ageing population. The ageing generation is called the baby boomers, made up of those who were born after the Second World War. The world has never seen so many well-off elderly people. Opportunities abound in the fields of: – age-defying and ‘ageing by design’ products – conditions that afflict the elderly, such as dental care, renal care, hearing aids, orthopaedics and cardiology – travel – relationship-building networks – nostalgia products – food preparation services – medical and healthcare provision – labour-saving technologies to fill the gaps in the workforce left by retirees – holiday-home construction – regenerative medicine – bio-tech and age-related drugs.

72 Part 1: Entrepreneurship in the twenty-first century

TOIL-O-PRENEURS IN INDIA Here’s a good example of entrepreneurs finding a niche in areas of over-population. About half of the poor populations in India’s large cities do not have access to sanitary facilities. With migration to the cities from the rural parts of India, there has been an increasing pressure on toilets and washing facilities, especially in cities like Delhi and Mumbai. Searchlight South Asia EDGE reports that for every 2500 people there is just one toilet. The consequences are that the environment and especially bodies of water become fouled with human effluent. The problem is especially acute for India’s women, whose dignity is compromised. Obviously there is a huge need and tremendous opportunity to solve these problems. That is why private sector entrepreneurs have been coming up to the challenge.

ENTREPRENEURIAL

•

•

•

Shramik Sanitation Systems provides community toilets in urban environments of India. 3S provides the portable toilets and collects waste for disposal. Administration and maintenance is provided by an NGO, which collects payment for use; and the Dell Foundation underwrites the collection. Ecoloove is scaling up its product and market-testing activities. Their solution comprises a tricycle-mounted mobile toilet. The mobile toilet provides employment and empowerment to ‘toil-o-preneurs’, who are women from the slums who can lease and operate the toilets and offer a hygienic sanitation solution to other women in the same area. The World Toilet Organization (WTO) is a global non-profit organisation committed to improving toilet and sanitation conditions worldwide. WTO aims to connect with the poor by branding toilets as status symbols, and an object of desire. WTO is building a market infrastructure where the poor demand toilets, thereby breaking the taboo about toilets and sanitation and instead making it a mainstream topic. WTO organises successful World Toilet Summits where organisations can learn from one another. The summits address critical issues about toilets and sanitation technology, development, funding for design and maintenance, social entrepreneurship, research and various other related topics. Sources: Adapted from Usha Ganesh, ‘How ‘‘toil-o-preneurs’’ are scaling sanitation solutions’, Searchlight South Asia, http://urbanpoverty.intellecap.com/?p¼410; and World Toilet Organization, ‘Our story’, http://worldtoilet.org/who-we-are/our-story.

WATER In the new millennium, the planet, with its diverse and abundant life forms, is facing a severe water crisis. All the signs suggest that it is getting worse and will continue to do so. More than two-thirds of the Earth is covered by water and the human body is made mainly from water.23 Nevertheless, water is one of our scarcest resources, although the crisis is actually one of how we mismanage water, rather than a shortage of supply. The real tragedy is the effect that the water crisis has on the everyday lives of people who are blighted by waterborne disease, live in degraded and often dangerous environments, or cannot get enough to eat due to water scarcity. The natural environment is also suffering. It is groaning under a mountain of waste dumped onto it daily and from overuse and misuse by those with little concern for the consequences and for future generations.24 Only a small proportion of the world’s water is available for human use and much of it is used for sanitation, industry and irrigation. Water is difficult to purify, not easily transportable and – most importantly – impossible to substitute, yet its supply has played a great part in the proliferation of the human race. Enterprising engineers, entrepreneurs and innovators early on developed the transport and storage facilities required for fresh water (such as aqueducts and artificial lakes) that made it possible to have bigger cities further away from freshwater access. Meanwhile, agri-preneurs have created high-yielding crops and animals that consume astonishing amounts of water, called embodied water. One cup of coffee requires 140 litres of water to produce, while 1 litre of milk requires 1000 litres of water.25 It can take 15 500 litres of water

Chapter 3: Entrepreneurship and sustainable development 73

to make 1 kg of beef or 3000 litres to produce 1 kg of chicken. However, these same livestock produce more than 10 billion tonnes of mineral-rich effluent each year that is a major source of pollution. (In contrast, kangaroo meat has less impact on the environment, contributing little methane and negligible soil erosion.) In most countries, it is not humans who consume most of the water; it is industry and especially energy production (such as atomic energy plants) and agriculture. It is predicted that by 2025 more than 35 per cent of the world population will be living in waterstressed regions, which means they will be affected by chronic or recurring shortages of fresh water. Other regions have the reverse problem. They will have a higher rainfall, floods, mudslides, typhoons and cyclones. Climate change will increase the number of people at risk of absolute water scarcity by 40 per cent this century.26 Where do entrepreneurs fit into this crisis? It’s a double-edged sword. On the positive side, smallscale local water providers, also known as hydropreneurs, already serve an estimated 50 per cent of the urban population in South-East Asia.27 They fill the void left by the market failure of the formal water sector. Their main obstacle is lack of financing, which in good entrepreneurial tradition typically comes from personal assets, profits from other businesses, community contributions and short-term credit from local banks or microcredit agencies. On the negative side, it’s worth noting that some other water-preneurs are responsible for one of the most egregiously wasteful commodities in the world today: bottled water. Bottled water is more expensive than petrol and contributes greatly to greenhouse emissions through the production of plastic bottles made from petroleum, most likely at a factory that burns fossil fuels. Also, consider the emissions involved in shipping the bottles long distances (water is quite heavy), keeping them refrigerated and finally, transporting them for recycling or land-fill (yet another ecological impact). In developing economies bottled water increases the gap between the water haves and the water have-nots.28

Ever drink ‘Fiji Water’? Read how it wrecked village life on a Pacific island via CourseMate Express.

HYDROPRENEURS In Quantum of Solace, James Bond battles a corrupt environmentalist to prevent a company from taking over Bolivia’s water supply. The challenges in the water industry are among the most complex in the world. In the face of increasing urbanisation, climate change and shrinking resources, the world is thirsty for solutions. Unfortunately, James Bond is not always available for action. But here are some of this century’s 007s. • • •

ENTREPRENEURIAL EDGE

The HydroPreneur Programme (HPP) in Singapore aims to develop entrepreneurial water talents and cutting-edge ventures. WateROAM produces a mobile water filtration device for natural disaster victims to get clean water quickly. Hydro-CLEAR has created a material that absorbs up to 190 times its weight in oil and organic solvents. This could help clean up spills in rivers and seas and remove oil contaminants in waste water.

The word Sarvajal means ‘water for all’ in the ancient Indian Sanskrit language. This company’s major product is clean drinking water for villages throughout rural India. In the larger settlements, Sarvajal hires locals to run its filtration plants. In the smallest areas, the company installs dispensing machines that are powered with solar energy. Villagers can purchase their clean water using pre-paid or top-upable smart cards. Here are some ways that new entrepreneurs can make money and add value: •

Collect storm water and rainfall more comprehensively. Economically recovering storm water and rainfall is a simple way to increase water supply by as much as 5–7 per cent worldwide. This is a ripe, low-hanging fruit for most rainy season countries. On a smaller scale, households could recycle water for domestic uses other than drinking, while cities, towns and villages could collect rain more effectively. cont.

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74 Part 1: Entrepreneurship in the twenty-first century cont.

•

•

•

•

Store and transport water in a sustainable and safe way. There is an enormous need for more reliable solutions to store, transport and deliver already filtered water that is currently wasted or re-contaminated over time. Stored fresh water is prone to contamination. Transporting drinkable water is also a challenge. The water infrastructure is such that more than 30 per cent of water is lost during transportation in India and China. Fixing the infrastructure and regaining that 30-something per cent loss requires higher maintenance and hence more public funding. Make existing fresh water safe to drink. In India, diseases such as malaria, typhoid, cholera and diarrhoea kill 1600 children every day. In this case, when there is fresh water, consumers do not trust its quality. They refuse to drink it without controlling its filtration. The primitive solution is to boil the water, which is expensive energy-wise. Another solution is to install a filter and chlorinate or bleach the water before consumption. New types of purification cartridges look promising and are cheap to install. Another solution uses recycled shellfish, processing waste that removes suspended sediment, heavy metals and organic contaminants from construction water. Convert seawater into drinkable water. This process is called desalination. It is enabled by ‘reverse osmosis’ that separates salt and other contaminants from the fresh water by pushing the seawater through filtration membranes at high speed. Until a few years ago, this process was not affordable as the cost of energy to desalinate seawater was four times the cost of the traditional solution. Funded by venture capital, innovation in desalination takes different forms – some companies focus on the filtering membranes, others on reducing energy needed for the reverse osmosis process and still others on entirely new approaches that do not require membranes. Conserve available fresh water by reducing the water footprint of existing products and services. This last category is made up of water-conserving solutions that dramatically reduce water usage. Roughly 85 per cent of the world’s water is used by agriculture, 10 per cent by industry and 5 per cent by households. There is a tremendous opportunity for new technologies to reinvent agriculture – food will have to be grown on much smaller pieces of land to conserve scarce and probably more expensive water. Other fundamental transformation processes will need to be invented to dramatically reduce the water footprints of industries and households. In the next five years, the key driver for adoption of new technologies and processes will be fast-rising water prices. Another way to reduce one’s water footprint is by recycling domestic water. Sources: Adapted from Singapore International Water Week 2007, ‘Hydropreneur Programme’, http://www.siww.com.sg/hydropreneur; Dominique Trempont, ‘Water shortages: Opportunities for entrepreneurs’, 8 March 2009, http://www.sramanamitra.com/ 2009/03/08/water-shortages-opportunities-for-entrepreneurs/; ‘Water for all: Social entrepreneurs in India’, The Economist, 20 March 2013, http://www.economist.com/blogs/schumpeter/2013/03/social-entrepreneurs-india; Feng Zengkun, ‘‘‘Impressive’’ pitches by water entrepreneurs to woo investors’, The Straits Times, 3 June 2014, http://www.stjobs.sg/career-resources/ training-and-development/impressive-pitches-by-water-entrepreneurs-to-woo-investors/a/166903.

BIODIVERSITY Of the calamities facing the world today, the ongoing extinction of species is probably the worst. As Pulitzer Prize–winning biologist Edward O. Wilson of Harvard University has said: The worst thing that can happen … is not energy depletion, economic collapses, limited nuclear war, or conquest by a totalitarian government. As terrible as these catastrophes would be for us, they can be repaired within a few generations. The one process ongoing that will take millions of years to correct is the loss of genetic and species diversity by the destruction of natural habitats. This is the folly that our descendants are least likely to forgive us for.29

Wilson predicted that by 2100 half the world’s species would be extinct if present trends continue.30 The present rate of extinction may be up to 140 000 species per year.31 Biodiversity means the variety of life in all its forms. The immense biological diversity on our planet took billions of years to evolve and only a fraction of today’s species have been identified and given official names. The Earth cannot function properly without biodiversity because a well-working ecosystem provides the environment with essential services, such as purification and protection of air and water resources, soil formations, nutrient storage and recycling, stabilisation and moderation of climate, food, medicines, genetic diversity, future resources, leisure and cultural, aesthetic and intellectual benefits. The problem is that humans have savagely damaged the Earth’s biodiversity.

Chapter 3: Entrepreneurship and sustainable development 75

People are changing Earth so much, warming and polluting it, that many scientists are now calling this the anthropocene extinction event, the ongoing mass extinction of species caused by human beings. It is actually Earth’s sixth extinction event. The Earth has already gone through five major extinction events before caused by volcanism, gamma ray bursts and an asteroid strike – the one that killed the dinosaurs. Today, humans are causing species extinction by producing greenhouse gases, hunting and overfishing, deforestation, pollution and contamination, modification of river systems, and transmission of infectious diseases.32 Humans’ inventiveness and enterprising spirit created cities and industries, which has made previous living space uninhabitable for thousands of species. Entrepreneurial innovations have led to higher consumption of resources, which nature could not replace quickly enough. As adventurers criss-crossed the planet, they carried with them the technological means of mass destruction and the threat of introduced, alien species that disturbed the balance of ecosystems. This is not what Schumpeter had in mind when he called entrepreneurs the agents of ‘creative destruction’. Entrepreneurs have played their part in species extinction too. A good example is given in the following Entrepreneurship in Practice box ‘Entrepreneurship and ecocide’.

ENTREPRENEURSHIP AND ECOCIDE Penguin digesters used by entrepreneur Joseph Hatch

ENTREPRENEURSHIP

For thousands of years, entrepreneurs have raped and pillaged the IN PRACTICE environment. Today we might call entrepreneurial ecocide, this namely large-scale environmentally catastrophic business activities. Ecocide is also a term for killing a species in an ecosystem to disrupt its structure and function. However, it has only recently been classified as a crime. For centuries people admired the entrepreneurial spirit that launched such ecocidal industries as whaling, the felling of indigenous forests and the harvesting of coral reefs. In the Pacific both Europeans and the indigenous Polynesians,  ori, carried such as New Zealand’s Ma out mass exterminations of species Source: ª Marjan Lousberg. in the name of enterprise. One intrepid Kiwi entrepreneur solved the ‘oil crisis’ of the 1890s by killing and boiling up millions of penguins from 1889 to 1919. New Zealand’s Joseph Hatch may go down in history as the most ecocidal entrepreneur ever. He was a man of his time – a time when entire species were brought to near extinction in the quest for profit.

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Hatch emigrated as a young man from London to Melbourne, Australia, where he started out with a wholesale druggist firm. Recognising his entrepreneurial talent, in 1862 the firm sent him to open a branch in Dunedin, on the South Island of New Zealand. Hatch was what we call today a ‘serial entrepreneur’. Besides operating chemist shops, he established a bone mill fertiliser plant, manufactured soap and candles, developed sheep-dip and rabbit poison, exported rabbit skins and built railways. In the 1870s Hatch spotted a huge market niche in rope manufacturing. At the time ropes were essential for hunting, pulling, fastening, attaching, carrying and lifting. One could say that ropes were indispensable to economic progress. Ropes needed ‘batching oil’ as a lubricant for drawing and combing the jute fibres together. Until that time, rope makers relied on seal oil and whale oil from creatures that required huge industry and energy to capture – not to mention danger. But Hatch worked out that it was much easier to catch penguins, which he rendered 900 at a time in huge digesters, resulting in one-half litre per bird. He saw his oil as an integral part of an industrial complex that was the glorious Victorian Age of Empire. Hatch gained a licence from the Tasmanian government and set up shop on Macquarie Island, a bleak, inhospitable island with no sheltered anchorage about halfway between New Zealand and the Antarctic. His business eventually was closed down by public protest but over nearly 30 years, from 1890 to 1919, Hatch killed about two million penguins on Macquarie Island. Hatch’s activities generated the first truly international conservation campaign. After the First World War, Antarctic explorers began to publicly criticise Hatch’s Southern Isles Exploitation Company on Macquarie Island and, in 1919, the Tasmanian government withdrew his licence. Many of the great names of the time such as Baron Walter Rothschild and H. G. Wells lined up against him. It could easily have been fur or whales that stirred a global reaction, but unluckily for Hatch, saving the penguin became the vogue cause of the day. By and large the Macquarie penguins after many years have managed to recover from the slaughter of the past. The elephant seals, also boiled for their blubber, have also managed to regain their numbers. Only the fur seals, hunted for their pelts, had been hunted down to too small a number to recover to their original high numbers. Macquarie Island was declared a wildlife sanctuary in 1933 and in 1977 it became the first biosphere reserve in the Southern Ocean. Source: Nigel Benson, ‘The good oil on Mr Hatch’, Otago Daily Times, 10 September 2008, http://www.theatreview.org.nz/reviews/ printreview.php?id¼626; Philip Matthews, ‘The penguin history’, New Zealand Listener, 10 March 2007, http://www.listener.co.nz/culture/thepenguin-history; Alan De La Mare, ‘Hatch, Joseph’, from the Dictionary of New Zealand Biography. Te Ara – the Encyclopedia of New Zealand, updated 30 October 2012, http://www.TeAra.govt.nz/en/biographies/2h19/hatch-joseph; Wikipedia, Licensed under the GNU Free Documentation Licence from the Wikipedia article ‘Joseph Hatch’, http://en.wikipedia.org/wiki/Joseph_Hatch; Geoff Chapple, ‘Harvest of souls: The oil baron of Invercargill’, New Zealand Geographic, 74, 2005, 40–53, http://www.nzgeographic.co.nz/archives/issue-74/harvest-of-souls. Compare Joseph Hatch’s story to a similar case of Quakers engaged in whaling: Hess, Andreas, ‘Radical Protestantism and doux commerce: The trials and tribulations of Nantucket’s Quaker whaling community’, Economy & Society, 41(2) (2012), 227–57.

As we pointed out at the top of the chapter, the greatest damage to biodiversity has likely been done by necessity entrepreneurs in the ‘lungs of the Earth’ – the rainforests. Rainforests are found in South-East Asia, from Myanmar to the Philippines, Indonesia, Papua New Guinea and north-eastern Australia. Rainforests continuously process vast quantities of carbon dioxide into oxygen and support tens of millions of species of plants, insects and animals. A biofuel entrepreneur who cuts down the rainforest to plant oil palms in Malaysia or Indonesia may well bring his family out of poverty and realise his entrepreneurial dreams, but his factory upsets the environment’s equilibrium, results in a considerable loss of plant and animal species, and has serious implications for the survival of indigenous cultures. From an entrepreneurial perspective, if you had one dollar to invest, where in the world would it contribute most towards slowing the current rate of species extinction? One way to answer such a question is to look at the map of irreplaceable biodiversity hotspots that are most threatened with species extinction (see Figure 3.5).33

Chapter 3: Entrepreneurship and sustainable development 77

FIGURE 3.5

BIODIVERSITY HOTSPOTS OF THE WORLD

California Floristic Province

Madrean Pine-Oak Woodlands

ont

an

e

Caribbean Islands

Guinean Forests of West Africa

IranoAnatolian

Japan PolynesiaMicronesia

Philippines

Sundaland

Tropical Andes

Madagascar and the Indian Ocean Islands

Atlantic Forest Chilean Winter RainfallValdivian Forests

Mountains of Southwest China

Eastern Himalaya

IndoBurma Western Ghats and Horn of Sri Lanka Africa

E a s te r n

Cerrado

A fr o m

Mesoamerica TumbesChocóMagdalena

Mountains of Central Asia

Caucasus

Mediterranean Basin

Succulent Karoo Cape Floristic Region

Wallacea

East Melanesian Islands New Caledonia

Coastal Forests of Eastern Africa MaputalandPondoland-Albany

Southwest Australia Eastern Australia

New Zealand

Source: Adapted from Biodiversity Hotspots map, Wikipedia.

The global loss of species is even worse than previously thought with populations of mammals, birds, reptiles, amphibians and fish having declined by an average of 52 per cent since 1970.34 One particularly stark example is global tiger numbers, which have reduced from 100 000 a century ago to just 3000 today. Action is urgently required to halt the loss of biodiversity, but governments and non-governmental organisations (NGOs) cannot do it alone. This is where biodiversity entrepreneurs must step in. The biodiversity business is defined as ‘commercial enterprise that generates profits via activities which conserve biodiversity, use biological resources sustainably and share the benefits arising from this use equitably’.35 Entrepreneurs can increasingly carry out market activities that generate biodiversity protection by structuring economic incentives, opening up markets, and creating retailing and marketing opportunities. Good examples are biosphere reserves and national parks and organic food production that have some beneficial effects on biodiversity.36 The entrepreneurial business case for biodiversity is easy to make when a business depends directly on it to operate. This is easy to see in nature-based tourism, where the income stream to private enterprise depends very clearly on the health of the surrounding ecosystem. In such cases, business owners and managers need little persuasion to invest in biodiversity management. Entrepreneurs can also find opportunities in other sectors, where greater biodiversity is associated with lower costs, increased productivity and ultimately higher profits. One well-known entrepreneur, Interface CEO Ray Anderson, has even asked if there is a business case for eliminating life on Earth.

78 Part 1: Entrepreneurship in the twenty-first century

ENTREPRENEURS PROTECTING THE ENVIRONMENT

ENTREPRENEURIAL EDGE

A growth area in sustainable entrepreneurship are the booming markets for ‘environmental services’. Entrepreneurial companies big and small are already making money out of conserving, sustainably using and (in one way or another) sharing benefits from the profits of agriculture, ecotourism and other biodiversity pursuits. Here are some innovative environmental services that entrepreneurs have created to protect the environment. • •

• • • • • • •

•

• •

Aquaculture: raising aquatic animals or plants for food. Biobanking, which addresses the loss of biodiversity and threatened species by creating a market in biodiversity credits, providing incentives to protect biodiversity values. Biodiversity offsets: providing for protection measures to compensate for possible reductions in biodiversity Bio-prospecting is the systematic search for genes, compounds, designs and organisms that have a potential economic use and might lead to a product development. Carbon sequestration in biomass: removing carbon from the atmosphere and depositing it in living or recently dead organic material that can be used as an energy source. Crop genetic diversity insurance: selling insurance that allows adaptation to changing environmental conditions. Ecosystem service ‘broker’ purchases biodiversity credits from landowners and sell credits to mitigation buyers. Ecotourism: more diverse ecosystems as destinations for tourism. Payments for ecosystem services (PES): offering incentives for ecological services, such as climate change mitigation, watershed services, biodiversity conservation, genetic resources such as bio-prospecting for natural medicines, water purification, waste treatment, pollination and erosion control. Reducing emissions from deforestation and forest degradation (REDD): creating financial value for the carbon stored in forests, offering incentives to reduce emissions from forested lands and invest in low-carbon paths to sustainable development. Species banking: mitigating the damage to a species by restoring or rescuing the species nearby, resulting in no net loss of biodiversity. Virtual water trade: taking advantage of water being ‘embedded’ in products and services, e.g. water-abundant countries specialising in export of agricultural products.

FOOD Go online to see more information on the major organisations working on environmental services markets

The human right to food is embodied in the Universal Declaration of Human Rights (UDHR), Article 25, which states, ‘Everyone has the right to a standard of living adequate for the health and wellbeing of himself and his family, including food’. This right is most endangered in low-income, food-deficit countries. Hunger and malnutrition are still the number-one risks to health worldwide. There certainly is a wealth of opportunities here for entrepreneurs. Food – or lack of it – is where a changing climate will exert some of its most troublesome effects in the twenty-first century. Because of droughts, shifts in rainfall patterns and higher temperatures, there are likely to be major changes in where and when food is produced on the planet’s surface. The richer parts of the world (such as Northern Europe and Canada) look set to reap the benefits (due to increased rainfall from global warming) while crop yields in the tropics, home to hundreds of millions of subsistence farmers, are likely to drop. Humans are an enterprising lot, and we use about a third of the Earth’s land surface for farming and other purposes.37 An astounding three-quarters of farmers are self-employed (see Table 1.4) and food production is the most widespread enterprise in the world. Thirty per cent of the world’s population farms 40 per cent of the Earth’s land surface not locked in ice.38 Yet a total of 842 million people in 2011–13, or around one in eight people in the world, were estimated to be suffering from chronic hunger, regularly not getting enough food to conduct a productive life. More than 60 per

Chapter 3: Entrepreneurship and sustainable development 79

cent of the hungry were in the Asian regions (see Figure 3.6). The total number of undernourished people has fallen by 17 per cent since 1990–92.39 Yet, hunger and malnutrition are still the main risks to health worldwide – risks greater than AIDS, malaria and tuberculosis combined.

Total = 805 million

Oceania 1 Caucasus and Central Asia 6 Northern Africa 13 Developed regions 15 Western Asia 19 Latin America and the Caribbean 37 South-Eastern Asia 64

Eastern Asia 161

Sub-Saharan Africa 214 Southern Asia 276 Source: Food and Agriculture Organization of the United Nations, 2014, ‘The State of Food Insecurity in the World: Strengthening the enabling environment for food security and nutrition’, Rome, Italy, http://www.fao.org/3/a-i4030e.pdf. Reproduced with permission.

Providing food and combating climate change is a two-way street and the food industry definitely influences climate change. On the one hand, growing crops and rearing livestock have the largest negative impact on climate change of all the parts of the food system. If clearing forests to create farmland is included, then agriculture is estimated to be responsible for nearly one-third of global greenhouse gas (GHG) emissions.40 This includes food-related gas emissions, fertiliser manufacture, refrigeration, deforestation and land-use changes. There are also positive effects because it can work the other way as well – climate change can increase food production. Scientists have not reached a consensus about the potential impact of climate change on harvests because it depends on where farming and ranching are done. The output of some areas (particularly in wealthy countries like the UK, Germany and Canada) may well be boosted by warmer, wetter growing conditions and by increased supplies of carbon dioxide,41 while other regions (such as developing countries in the tropics) are likely to suffer from increased droughts and floods. Food entrepreneurs have the potential to play a much more significant role in achieving the United Nations’ Sustainable Development Goals of growth and social justice, inasmuch as they constitute a crucial link between agriculture and industry. In addition to everything else they must consider, entrepreneurs now need to judge a particular country’s or region’s vulnerability to climate change when making business decisions. Vulnerability is a function of exposure, sensitivity and adaptive capacity. Figure 3.7 shows a worst-case scenario of vulnerability to climate change in the late twenty-first century.

FIGURE 3.6 WORLD UNDERNOURISHMENT BY REGION (MILLIONS)

80 Part 1: Entrepreneurship in the twenty-first century

FIGURE 3.7 SUMMERS IN 2081–2100; LIKELIHOOD THEY WILL BE THE WARMEST ON RECORD

Source: Figure SPM.8 (a) (right panel) from ‘IPCC, 2013: Summary for Policymakers’. In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the 2 Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK, and New York, NY, USA.

GREENHOUSE GASES AND TEMPERATURE The first decade of the twenty-first century was the warmest on record for the entire world.42 In Australia, for example, temperatures have become so extreme that the Bureau of Meteorology had to add a new colour to the top of its scale, a suitably incandescent purple (see Figure 3.8). What causes these temperatures? Global warming produces too much carbon dioxide (CO2) in the atmosphere – which acts as a blanket, trapping heat and warming the planet. As humans burn fossil fuels like coal, oil and natural gas for energy or cut down and burn forests to create pastures and plantations, carbon accumulates and overloads the atmosphere. For example, most of Australia’s greenhouse gas emissions come from the burning of fossil fuels for energy (e.g. for electricity and transport). When oil, gas or coal burns, carbon contained within it combines with oxygen in the air to create carbon dioxide. Australia’s electricity-related emissions are high because Australians rely primarily on coal for electricity generation and coal is the most greenhouse-intensive fuel. Meanwhile, Australians are the world’s highest emitters of CO2.43 Today, more than 85 per cent of the world’s energy demands are met by fossil fuels. The substantial use of fossil fuels goes back to the time of the Industrial Revolution. Think about the entrepreneurs and their inventions that depend on fossil fuels: aeroplanes, cars, electrical power plants, paper, plastic, rockets, steam engines, steel and electric lights. Next time you fill up at the petrol station, ponder this figure – it took over 23 tonnes of plants to produce each and every litre of petrol you pump into your tank.44

CLIMATE CHANGE ECONOMICS FOR ENTREPRENEURS Entrepreneurs should be familiar with some basic principles of climate change economics (also known as environmental economics). The field looks at how economic activity – including

Chapter 3: Entrepreneurship and sustainable development 81

FIGURE 3.8 AUSTRALIA ADDS NEW COLOUR TO TEMPERATURE MAPS

Source: Interactive Weather and Wave Forecast Maps, ª Bureau of Meteorology. http://www.bom.gov.au/australia/charts/viewer/index.shtml.

entrepreneurial activity – affects the environment. It seeks economic solutions to minimise harm to the environment while allowing maximum economic benefit. It addresses environmental problems such as pollution, negative externalities and valuation of non-market environmental effects.45 First we review some of the basic concepts in climate change economics and then later we look at how sustainable entrepreneurship can help resolve the environmental problems of global socioeconomic systems.

MARKET FAILURE IN THE COMMONS From an economics perspective, there clearly has been a complete market failure in protecting the Earth’s resources. Market failures not only prevent entrepreneurial action to resolve environmental problems but can actually motivate entrepreneurs toward environmentally degrading behaviour.46 This may explain why business entrepreneurs have been some of the greatest violators and polluters in their headlong quest for creating value.

82 Part 1: Entrepreneurship in the twenty-first century

Successful markets are supposed to be characterised by perfect and transparent information where all competitors can see the moves of other competitors, as well as their consequences. Consumers can then choose the best products, and the market will reward the best companies with higher sales. Much to our disappointment, markets have very real imperfections. We know these as externalities, both positive and negative.47 • A positive externality is a benefit that people might receive even though they are not part of the decision and are not considered in any way by the entrepreneur. This is called the ‘freerider’. For example, the attractiveness of well-kept farms spills over into the tourism industry. Another good example is when an entrepreneur invents something or creates valued-added information, then others can benefit by exploiting the invention or information. • A negative externality is where costs spill over onto someone not involved in producing or consuming the good. In the magnitude of potential harms, climate change from greenhouse gas emissions has been ranked as the number one externality of economic activity. But who will pay to clean it up? To date, business has been free to exploit the atmosphere and leave the clean-up to governments and the public. The dilemma here is that valuable public goods such as the atmosphere or water supplies can suffer from Hardin’s famous tragedy of the commons.48 Imagine shepherds who share a common pasture (the commons), on which they are all entitled to let their sheep graze. Each shepherd wants to put as many sheep as possible onto the land even if the commons are damaged as a result. The individual shepherd gets all the profits while the damage to the commons is shared by the entire group. If all the shepherds make this rational decision individually then the commons are destroyed and all suffer. In this sense there is little incentive for an individual entrepreneur to curb his or her activities to benefit others. No one owns the resource yet everyone depends on it. A lot of society’s current resource-based problems suffer from this, including over-irrigation, habitat destruction, over-fishing and traffic congestion. Figure 3.9 depicts natural, social and culture aspects of what we call the human commons. FIGURE 3.9 THREE FORKS OF THE COMMON RIVER

Nature Air...water...dn a..photos ynthesi animals...pl s...se ants. wetlands... ..antiboitics...oc eds...topso forests... i rivers... eans...fi she l...airwaves...minerals... lakes. ..solar ries...aquifers...quie t... energy.. .wind energy ... Community

unds...the calendar...h Streets...playgro . olidays...universiti es...libraries...museums.. social insurance...law...money...accounting sta s... t e k r n a d a m l r d a t s i . p . . a c political institutions...farmer’s market s...flea markets...craigslist...

The Commons

s... ment al instru et... c i s u m . . . y r t n s i e Inter . .religion...physics...chem ilosophy.. onics...th software.. age...ph zz...ballet...hip-hop...astronomy...electr La n g u n source ja e . . p . o . . c . i s s c i t a u m e ..biology...math cal m ...medicine. classi pectrum cast s broad

Culture

Source: From Capitalism 3.0, Copyright ª 2006 by Barnes, P. Berrett-Koehler Publishers, Inc., San Francisco, CA. All rights reserved. www.bkconnection.com. Reprinted with permission of the publisher.

In the world of entrepreneurs, businesses are usually free to exploit and plunder while downstream recipients must clean up the mess or restore the resource. Generally speaking, there are two practical ways to try to overcome this free-rider problem. One is the whip (e.g. compulsory taxation or clean-up), the other the carrot (e.g. getting people to pay voluntarily). Both of these methods are highly controversial and easily politicised, with opposition to environmental regulation centring on the increased costs of doing business through taxation, relocation of businesses, higher unemployment and outright denial of any linkage between carbon emissions and greenhouse gases.49

Chapter 3: Entrepreneurship and sustainable development 83

INCENTIVES As you may see, under certain conditions, entrepreneurs are unable to act sustainably, and they have sometimes contributed to the present climate crisis. No one doubts that a sustainable business yields benefits for everyone, but entrepreneurs can face a dilemma. Why should they take costly sustainable actions when the competitors do not? Why should I install costly air scrubbers to clean up my emissions when my Chinese competitors just pollute their environment? Some call this the ‘prisoner’s dilemma’, where players trying to maximise their own selfish utility do worse than those who try to maximise the benefits of the group. Here’s the classic example. Two suspects are arrested by the police, who have weak cases against both of them. They hold the suspects in separate cells and tell each that if they inform on the other, they will get leniency. If not, they are told, they will get harsh prison terms. What typically happens in this situation is that each prisoner implicates the other to get a lesser sentence. As a result, the police end up convicting both suspects. Both suspects made rational decisions (to implicate the other) based on the available information. But the problem was that the available information was incomplete. The key missing information that the suspects did not have was that the police had a weak case. And, as a result, the better solution for the suspects would have been to keep their mouths shut, in which case, they both would have walked.

Here, there is basically a ‘divergence between individual and collective incentives’.50 Entrepreneurial sustainability may be punished rather than rewarded. The result is that self-interested entrepreneurial behaviour that degrades the environment has often been rewarded. Can entrepreneurs actually break out of this ‘green prison’ to overcome suboptimal market incentives and achieve sustainability? Sustainable entrepreneurship would only work when individual and collective incentives are aligned. Pacheco et al. argue that entrepreneurs can break out of the green prison only if they become ‘norm entrepreneurs’ as well as business entrepreneurs. They must transform the rules, or rather the structure, of payoffs such that a strategy of mutual cooperation is more desirable. A variety of industries have witnessed the intervention of entrepreneurs in promoting self-enforced cooperative norms. Some examples might include: codes of sustainability behaviour among tourism operators in Australia, international sustainable coffee partnerships, and certification programs for organic foods. (Read how two Aboriginal Australian entrepreneurs did exactly that in the Entrepreneurship in Practice box ‘Sustainable tourism on an Australian isle’.)

SUSTAINABLE TOURISM ON AN AUSTRALIAN ISLE Two Indigenous Australians, John and Robyn, moved from urban to very rural Queensland to ENTREPRENEURSHIP start a new life together. Their kids were off their hands and they wanted to move back close to wider family and the traditional homeland of their people. After long negotiation with family and community members they moved to a potentially idyllic site on a headland some 15 years IN PRACTICE ago. They could envisage the potential of tourism as supplementary income and perhaps their sole income one day. Setting up an Indigenous tourism association John organised a luncheon of local seafood, invited all the Indigenous business owners within a 100 kilometre radius, and allowed them to discuss their problems. It was soon realised that the networking ability of the Indigenous operators brought more businesses collectively within the group than referrals from outside non-Indigenous tourist operators. From that day on they began networking more closely, marketing each other’s attributes to ensure competition and strengthening diversity. John was already known as a legendary fisherman in his region, having received the knowledge of the reefs and the sea trenches from his ancestors. A well-respected man within Indigenous circles, John owned a small boat and would occasionally take a tourist fishing when the sea was calm.

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The new Indigenous tourism association discussed the creation of game parks and sea parks. Taking the lead, John had already stopped fishing and taking crayfish and shellfish from the small bay in front of his resort. Within a few years it developed markedly, enjoyed a rich biodiversity and now tourists could snorkel and see crayfish and many species of fish close to shore. Other operators soon followed suit, creating interesting dive sites near their businesses, which further diversified their operations. Then a dilemma of the commons arose for the local fishing industry. The problem was that one operator allowed foreign tourists to fish and take molluscs, which seemed to attract more business. John knew the reefs, knew the coastline and knew that other operators were on the verge of exhausting the fishing stocks around the island. As an elder in his clan, he understood that it was critical to sustain the reefs, which would sustain his clan as well as the business that he set up. The only solution, he advocated, was to maintain strict catch limits to ensure the reef stocks and ensure that guests understood the cultural implications of sustainability. Most of his clients warmed to the experience because their introduction to this new fishing practice became a cultural lesson in respect for the sea, the local Indigenous clan and the wider clans that had lived in this country for many generations. Tourists were thrilled to gain exposure to such cultural practices, which for most was a unique experience. Those that didn’t like the environmental and cultural rules were advised of other operators who fished other species and did not follow sustainable practices. But still, John and Robyn wondered whether they could make more money by allowing unsustainable fishing. Questions 1 2

When the Indigenous operators first got together, what were the positives and negatives of this interaction? How sustainable can entrepreneurs be when one member of the network refuses to adopt voluntary norms? Source: Adapted from: Dennis Foley, ‘Entrepreneurial case analysis: Indigenous tourism on an Australian isle’, pp. 597þ from Frederick and Kuratko, 2nd edition.

PEAK RESOURCE THEORY Hubbert’s peak resource theory predicts the depletion of various natural resources. Hubbert used it initially to measure the end of finite resources such as coal, oil, natural gas and uranium, but the theory is now used increasingly with other resources such as water and wheat. A ‘peak curve’ applies to any resource that can be harvested faster than it can be replaced. Most worrisome is the size of the area under the curve called ‘future discoveries’. Figure 3.10 shows Hubbert’s theory as applied to oil reserves, and Table 3.2 highlights the forecast peaks for five key resources. 14

FIGURE 3.10 HUBBERT PEAK OIL – HOW LONG WILL IT LAST?

Production (109 bbls/yr)

12

Future discoveries 910×109 bbls

10

Proven reserves 250×109 bbls

8

Cumulative production 90×109 bbls

6 4 2 0 1850

1900

1950

2000

2050

2100

2150

2200

Year Source: Hubbert peak theory, Wikipedia.

Chapter 3: Entrepreneurship and sustainable development 85

TABLE 3.2

WHEN WILL IT ALL RUN OUT?

2012

Predictions of the timing of peak oil include the possibilities that it has recently occurred, that it will occur shortly, or that a plateau of oil production will sustain supply for up to 100 years. None of these predictions dispute the peaking of oil production, but disagree only on when it will occur.51

2025

If present trends continue, 1.8 billion people will be living with absolute water scarcity by 2025, and two thirds of the world population could be subject to water stress.52

2025

At year-end 2011 reported world coal reserves were enough to supply coal for 112 years.53

2020

There will be a world ‘decline in conventional gas production from about 2020’.54

2035

Predictions say that either the peak of uranium production has already occurred in the 1980s or that a second peak may occur some time around 2035.55

BUSINESS ADAPTATION TO CLIMATE CHANGE Here are some actions that companies are taking to adapt to climate change. •

•

• •

•

ENTREPRENEURSHIP

Club Med: Seeing that weather-related catastrophes are affecting tourism, Club Med, in addition to giving customers such benefits as upgraded air-conditioning, and discounted IN PRACTICE room rates, now offers hurricane guarantees or waivers that provide a replacement stay of the same duration and equivalent value as the one originally booked. Coca-Cola: The soft drinks giant has pledged to return all of the water it uses, back to nature. The goal has led to increased water efficiency and recycling as well as a number of conservation projects. As well as the obvious cost savings and environmental benefits, the company has also helped to protect its own water supply during periods of drought, as well as that of the communities living in the vicinity of its bottling plants. Starbucks: Starbucks has been helping coffee farmers in Mexico to adapt to changing growing conditions in order to protect its own supply of coffee and prolong the benefits of its cultivation for communities in Mexico. Allianz: Noting that annual damage from weather-related disasters is increasing dramatically, the insurance company has acquired thousands of new customers through micro-insurance policies tailor-made specifically for people who live near the coast and work in fishing, agriculture and plantations. The Intel Corporation’s Water Wars 3D gaming platform brings together previous research in both water conservation and gaming strategy to create a game platform that actually studies how role-players adapt to water shortages. The game’s playing surface uses the very real water shortage region of Rio Grande, New Mexico (USA). Researchers collection information on how the players respond, which feeds into studies on what we might actually expect to see in the real world. Sources: Dozens of these cases are available at UN Framework Convention on Climate Change, ‘Private sector initiative – database of actions on adaptation’, published by United Nations Framework Convention on Climate Change, ª 2014. http://unfccc.int/adaptation/workstreams/ nairobi_work_programme/items/6547.php.

CLIMATE RISK AND OPPORTUNITIES Entrepreneurs of the twenty-first century must now evaluate the specific risks and economic impact of their activities. Who runs the most risk for climate change? There are various types of risks, as outlined below. • Physical risks: These are the direct impacts of weather-related events, including water availability, rainfall levels, sea levels, damage to property, asset losses, heat-related illness or disease, enforced relocation of operations and increased commodity prices. Insurers now believe they have underestimated the financial cost of climate change damage and are warning that they could double premiums. Lloyd’s of London says damage and

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weather-related losses around the world have increased from an annual average of $50 billion in the 1980s to close to $200 billion over the last 10 years. Lloyd’s suffered a $1 billion loss after paying out the largest catastrophe claims on record – caused by earthquakes in Japan and New Zealand, storms in the US, and floods in Thailand and Australia.56 • Reputation risks: These are threats to a company’s brand value. Brand value constitutes as much as 70 per cent of a company’s market capitalisation57 and, although a new or small company may have little to risk, building brand reputation provides a big opportunity. Climate change has already become a mainstream marketing concern (see Chapter 10). Consumers are paying much more attention to business behaviour and companies that do not prepare for climate change run the risk of damaging their market and brand values. Those who do can find ideal opportunities to differentiate themselves with measures aimed, for example, at reducing their carbon footprint (see Chapter 15). • Competition risks: If companies do not take measures to reduce climate risks they are competitively disadvantaged. This might lead to increasing production costs caused by obsolete technologies and therefore to decreasing profits. • Regulatory risks: Climate change is increasingly seen by governments and the public as a serious market failure that can only be corrected through regulation and government intervention. Entrepreneurial companies must adjust to new laws and regulations that create competitive disadvantages because regulatory uncertainties make it difficult to plan ahead. There are two types of regulations: legislation such as permits and product requirements, and market-based regulation such as carbon taxes, emissions-trading schemes and fuel tariffs. • Litigation risks: Greater regulation leads to more litigation. There will doubtlessly be court actions against emitters, challenges that relate to carbon taxes and control, as well as scrutiny of disclosure of greenhouse gases in annual reports. There are marked regional differences in risk assessment of climate change, as shown in Table 3.3. Majorities of people in South Korea, Japan, the Philippines, Indonesia and Australia (5 per cent error rate) say climate change is a major threat to their countries. In contrast, Americans are relatively unconcerned about global climate change. Four-in-10 say it poses a major threat to their nation, making Americans among the least concerned about this issue, along with people in China and Pakistan.58

SOCIAL DISCOUNT RATE There is quite a time lag between climate change causes and effects. Greenhouse gases emitted today affect global temperatures in 50 years or so, just as we’re experiencing temperature rise caused by emissions 50 years ago. The problem is that everyone prefers to have something they need now rather than later, all other things being equal. Economists refer to that preference pattern as the discount rate on the future. That is the rate at which future return is discounted when compared to an immediate or present return. Let’s assume that sea levels will inundate coastal Bangladesh in 2050. A 50-year-old Bangladeshi grandmother living today along the coastline, with a life expectancy at birth of only 37 years, has a slender chance of living to 100. But her 10-year-old granddaughter today has a life expectancy of 61 years.59 The grandmother would be more likely to ignore risks of catastrophic events while her granddaughter would not. But we cannot say for certain whether coastal Bangladesh will actually be flooded in 2050. We may see rising temperatures and more storms today, but we cannot accurately predict their consequences. Will coastal flooding lead to the extinction of a particular species that, unknown to us,

Chapter 3: Entrepreneurship and sustainable development 87

TABLE 3.3

CLIMATE CHANGE OPINION BY COUNTRY

DO YOU THINK THAT GLOBAL CLIMATE CHANGE IS A MAJOR THREAT, A MINOR THREAT OR NOT A THREAT TO YOUR COUNTRY? MAJOR THREAT

MINOR THREAT

NOT A THREAT

DK/NA

South Korea

85

9

4

2

Japan

72

21

5

2

Philippines

66

26

7

1

Indonesia

59

27

8

6

Australia

52

34

12

2

Malaysia

43

34

12

12

United States

40

37

20

3

China

39

36

14

11

Pakistan

15

24

18

42

Source: Climate Change and Financial Instability Seen as Top Global Threats, Pew Research Center, June 24, 2013.

has contributed to our welfare? Or will hydrogen power become feasible such that we can maintain high energy consumption without adding to greenhouse gas emissions? What may seem catastrophic to us now may be technologically manageable to others later, so the real cost to them may be small and accurately reflected in a discounted value today. So climate change economists have come to agree that a constant discount rate on the future is no longer appropriate. They increasingly agree that we must calculate the social discount rate, which is a measure used to help guide choices about the value of diverting funds to social projects. It is basically the rate used to compare the wellbeing of future generations to the wellbeing of those alive today. Since climate change is occurring now, it is important to determine an accurate social discount rate on the benefits of reducing carbon dioxide emissions and greenhouse gases. Some people have argued that ‘giving future generations less weight than the current generation is ethically indefensible’.60

ARE OUR GREAT-GRANDCHILDREN AS VALUABLE AS WE ARE? Almost all public policy problems involve costs and benefits that accrue over time. The use of a ENTREPRENEURSHIP discount rate allows us to compare future costs and benefits with today’s costs and benefits. While there is general agreement about the need to use or specify a discount rate, there is much less agreement about the choice of discount rate. This involves making a judgement on IN PRACTICE whether the welfare of people living in the future is valued as highly as the welfare of people living today. Put simply, do we consider those living in the future to be equal to those living today? It also involves determining to what extent those living today should forgo consumption to benefit future, presumably richer generations. This embodies a judgement about the appropriate level of redistribution between generations, just as our existing tax and transfer system embodies a judgement about the level of redistribution that is fair between citizens living today. A higher value for either of these elements yields a higher overall discount rate, which in turn leads us to discount future costs and benefits relatively more. Source: Garnaut, R., Garnaut Climate Change Review – Update 2011. Update Paper one: Weighing the cost and benefits of climate change action, Published by Commonwealth of Australia, ª 2011. http://www.garnautreview.org.au/update-2011/update-papers/ up1-weighing-costs-benefits-climate-change-action.html, p. 20.

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ENTREPRENEURIAL ECOLOGY More than 25 years ago, a commission led by Norwegian Prime Minister Gros Harlem Brundtland was established by the UN’s World Commission on Environment and Development (WCED) to explore the state of the world’s natural systems and provide an outlook for global environmental health. The report, entitled Our Common Future, outlined an ominous situation wherein the world’s population was living well beyond the means of the planet to replenish natural resources, absorb pollution and regulate important climatic conditions such as temperature. The long-term solution would be for human society to become sustainable. Sustainability is a term which the commission defined as: ‘Meeting the needs of the present generation without compromising the ability of future generations to meet their needs’.61 The Brundtland Report led to the idea that markets were both the cause and the potential solution to the sustainability puzzle. It has also led to a rethinking of the concept of entrepreneurship. While climate change economics may lead to the conclusion that environmental degradation results from the failure of markets, entrepreneurship literature argues that opportunities are inherent in market failure. Combining these two positions we see that market failures represent opportunities for achieving profitability while simultaneously reducing environmentally degrading economic behaviours. It also makes us look at how entrepreneurs seize the opportunities that are inherent in environmentally relevant market failures.62 Let’s start by looking at the two ‘eras’ of entrepreneurship. In the era of industrial entrepreneurship (IE), from the nineteenth century through to the new millennium, entrepreneurs were not obliged to consider the environment in their planning and design. They focused on extraction of scarce resources with little regard to their replenishment, on global distribution without regard to distance, on rampant construction without regard to environmental consequences and on supply-chain shortcuts without regard to equity. Entrepreneurs were usually not oriented towards the prevention of negative effects, to the reversal of degradation, or to net improvement in the physical and social universes. In the age of industrial entrepreneurs, waste was not a design consideration. In the end these entrepreneurs had a negative impact on the environment and society. Now, in the age of sustainable entrepreneurship (SE), we need to think ecologically about the biosphere and to consider the waste embodied in products. We need to move beyond simplistic input–output analysis without regard to the consequences and to apply new concepts that take into account the living dimension of the products and services that we produce. Entrepreneurs need to seize upon the new set of what the United Nations calls ‘Sustainable Development Goals’ (see Table 3.4) as business opportunities to end poverty and hunger, improve health and education, make cities more sustainable, combat climate change, and protect oceans and forests. Entrepreneurs in times of crisis need to engage with new ideas and innovations that make a real difference. In essence, entrepreneurs can create net positive entrepreneurial impact loops because the biosphere is linked to the sociosphere and the econosphere. These entrepreneurial impact loops can trigger effects that can either amplify the degradation or the restoration in the biosphere.63 ‘Sustainable entrepreneurship’ is rather a recent term. Shepherd and Patzelt give the definition a distinctively conservationist colour: ‘Sustainable entrepreneurship is focused on the preservation of nature, life support and community in the pursuit of perceived opportunities to bring into existence future products, processes and services for gain, where gain is broadly construed to include economic and non-economic gains to individuals, the economy and society’.64

Chapter 3: Entrepreneurship and sustainable development 89

TABLE 3.4

SUSTAINABLE DEVELOPMENT GOALS/OPPORTUNITIES FOR ENTREPRENEURS

Goal 1

End poverty in all its forms everywhere

Goal 2

End hunger, achieve food security and improved nutrition and promote sustainable agriculture

Goal 3

Ensure healthy lives and promote wellbeing for all at all ages

Goal 4

Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Goal 5

Achieve gender equality and empower all women and girls

Goal 6

Ensure availability and sustainable management of water and sanitation for all

Goal 7

Ensure access to affordable, reliable, sustainable and modern energy for all

Goal 8

Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

Goal 9

Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation

Goal 10

Reduce inequality within and among countries

Goal 11

Make cities and human settlements inclusive, safe, resilient and sustainable

Goal 12

Ensure sustainable consumption and production patterns

Goal 13

Take urgent action to combat climate change and its impacts*

Goal 14

Conserve and sustainably use the oceans, seas and marine resources for sustainable development

Goal 15

Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

Goal 16

Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

Goal 17

Strengthen the means of implementation and revitalise the global partnership for sustainable development

*Acknowledging that the United Nations Framework Convention on Climate Change is the primary international, intergovernmental forum for negotiating the global response to climate change. Source: Open Working Group proposal for Sustainable Development Goals, ª 2014 United Nations. Reprinted with the permission of United Nations.

The concept of sustainable entrepreneurship puts the focus on the initiative and skills of an entrepreneurial person or team to achieve market success through innovations that protect and enhance the environment. More broadly, sustainable entrepreneurship is the intersection of the sociosphere, the econosphere and the biosphere.65 (See equation on the next page.) The biosphere (B) consists of all of the living and non-living things on Earth. In the equation that follows, the sociosphere (S) consists of all the people in a social system, all the roles they occupy and all their patterns of behaviour, all their inputs and outputs relevant to other human beings and all the organisations and groups they belong to. The econosphere (E) consists primarily of the segment of the sociosphere that is organised through exchange, where the exchange is mediated through prices. Australian researchers Diesendorf and Hamilton defined the econosphere as ‘the total capital stock, that is, the set of all objects, people, organisations and so on, which are interesting from the point of view of the system of exchange’.66 From a material point of view, we see objects passing from the biosphere into the econosphere in the process of production, and we similarly see products passing out of the economic set as waste as their value becomes zero.67

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We might see these concepts in an equation:

SE ¼ f (B þ S þ E) The elements are arranged in order of historical sequence. If we use ‘e’ to mean ‘embedded in or a subset of’, we get ‘social entrepreneurship is a function of the econosphere embedded in the sociosphere embedded in the biosphere’, or

SE ¼ f (E e S e B) Entrepreneurial ecology focuses on the sustainable combination of environment and entrepreneurship. The central idea is that there is a parallel between the natural system and the entrepreneurial system. Entrepreneurial ecology shifts the entrepreneurial process from linear (open loop) systems, in which resource and capital investments move through the system to become waste, to a closed loop system where wastes become inputs for new processes. How are Earth, people and the economy connected?68 The flow of energy and materials taken from and returned to their external environments is called throughput. For the most part this is an uneven exchange. Figure 3.11 shows that unsustainable entrepreneurs extract huge resources, thus depleting Earth (negative sign). Normally they return them as waste in devalued form. Sustainable entrepreneurship means returning resources in value-added form (dotted line to the positive sign). All three spheres share a struggle for survival. They extract a constant source of energy and materials to maintain their self-organised state of a rate of low degradation. Otherwise they would run down to the point of zero energy. In physics we call this degradation ‘entropy’ and the state of zero energy is called inertia.69 All three systems must engage in a continuous process of want-satisfying. This provisioning involves the identifying, extracting and processing of value. The problem is that entrepreneurs of the past have devalued this process with wanton extraction. FIGURE 3.11 ENTREPRENEURIAL ECOLOGY

Unsustainable entrepreneurship

Biosphere (S)

(–) (+)

Sociosphere (S)

• Physical environment • Climate and energy • Water, soil, flora and fauna • Atmosphere and topography • Human enterprise • Government and infrastructure • Knowledge, labour and capital • Opportunity and value • Business environment

Econosphere (E)

• Entrepreneurial factor conditions • Efficiency enhancers

Sustainable entrepreneurship

Up until the present day, some entrepreneurs have greatly undervalued the biodiversity, ecosystems and means of survival that nature provides, including resources such as energy, water, free space and materials. Humans have not valued nature as a living ecosystem. Rather than adding value to living materials they have only aimed to reduce (for example, through recycling) the quantity of dead resources. In the end, society has to implement complex regulations, incentives and tools to penalise entrepreneurs or to encourage them to reduce waste and mitigate the effects of negative entrepreneurship, which is unsustainable. What positive entrepreneurship (dotted line above)

Chapter 3: Entrepreneurship and sustainable development 91

can do is generate positive and sustainable impacts through value adding and eliminating designed waste, duplication, disposability, planned obsolescence and wasteful end purposes. Positive entrepreneurs create net positive-impact loop systems and innovations that create levers for biophysical improvements and social transformation. Take recycling as a case in point. Here we must make the distinction between down-cycling and up-cycling. • Down-cycling transforms waste materials and goods to lower uses. While it may address post-consumer waste, this is a small fraction of the waste entailed in extraction and processing. The obvious example is the recycling of plastics, which turns them into lower grade plastics without regard to the huge energy losses that were incurred in their production. Down-cycling is in essence negative. • With up-cycling, waste materials are used to provide new, higher-valued products.70 This is the practice of taking something that is disposable and repurposing it into a product of higher quality. An example would be reconstructing old mattresses, repairing and reusing carpet squares, turning wooden pallets into designer furniture and converting waste into art, edible chopsticks and compostable shoes. (Up-cycling is a good example of positive entrepreneurship because it adds value to the biosphere.) (See Table 3.5 and see Case 3.1 at the end of this chapter.) This may all sound theoretical to you, but when you sit down to write a business plan, you must consider all three Ps – People, Profits and Planet. Chapter 16: How to write a sustainable business plan, takes you through the concrete steps to conceive of a business model to respond to the issues raised in the present chapter. See particularly Figure 16.1, page 589, ‘The ecology of entrepreneurial business planning’.

FRAMEWORKS IN ENTREPRENEURIAL ECOLOGY Michael Morris, Donald Kuratko and Minet Schindehutte wrote an excellent article on how to understand entrepreneurship through frameworks. A framework provides a blueprint that makes order out of an abstraction, allows us to prioritise issues and helps identify relationships.71 The field of sustainable entrepreneurship is only just beginning. Researchers are just beginning to seriously consider how the two literatures of entrepreneurship and the environment interrelate, but there are some outstanding candidate frameworks that are beginning to emerge that bring entrepreneurship into the realm of climate change theory.

Natural advantage of nations Building on Porter’s famous The Competitive Advantage of Nations,72 the Australian approach to the ‘natural advantage of nations’ brings environmental improvement and competitiveness together. The natural advantage of nations shows that this new form of development – sustainable development – is far from being in conflict with economic goals and actually builds on the traditional central goal of economics that seeks to improve the wellbeing of all. The central message is that it is possible for economies to achieve high economic and job growth rates while dramatically reducing their negative impacts on the environment. Economic growth and negative environmental load on the planet can be decoupled, leading to unforeseen benefits for business, government and society. The authors identify a veritable manifesto for connecting entrepreneurship with sustainability: • dealing transparently and systematically with risk, uncertainty and irreversibility • ensuring appropriate valuation, appreciation and restoration of nature • integration of environmental, social, human and economic goals in policies and activities

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TABLE 3.5

SUCCESSFUL UP-CYCLING COMPANIES

COMPANY

UP-CYCLING IDEA

WEBSITE

Gabarage

Fashion and homewares made from bike tubes, fire hoses, ring pulls, newspaper, glass bottles, reclaimed denim and sari silk, plastic bags, truck tubes, PET bottles, watch and camera parts, billboards, seatbelts, and whisky barrels using skilled artisans in both India and Mexico to produce our fashion and homewares.

http://www.gabarage.at/

E&KO

Uses industrial waste to make new luxury products, turning fire hoses into bags, belts, wallets and cufflinks.

http://elvisandkresse.com/about/

Herme`s Petith

Leftover material and damaged goods for a new line of accessories and de´cor alleviating the amount of waste materials that Herme`s produces. Series of ‘unidentified poetic objects’ formed from defective inventory and factoryfloor leftovers.

lesailes.hermes.com/gb/en/petith

Hipcycle

Finds and sells best in up-cycled products from the world’s most creative small businesses and offers them all in one place.

http://hipcycle.com

Looptworks

Locates and rescues materials that are left over from premium manufacturers. Produces limited edition, hand-numbered, up-cycled products with Loopt4Life guarantee.

http://looptworks.com/

Patagonia

Takes back or repairs gear that is worn out. Asks customers not to buy what they don’t need.

http://www.patagonia.com

Preserve

Offers up-cycled, recycled and eco-friendly products and vintage, antique, retro goods to reuse and re-love.

https://www.preserveproducts.com/

Rediscovery Centre

Rediscover Furniture, Rediscover Fashion, Rediscover Paint and Rediscover Cycling use waste and unwanted materials as resources and raw materials for new product design.

http://www.rediscoverycentre.ie/

ReWorks Upcycle Shop!

Collects recycled goods and makes toothbrushes and kitchenware from recycled plastic yoghurt containers, lip balm tubes and water-filtering systems.

http://www.shopreworks.ca

TerraCycle

Collects difficult-to-recycle packaging and products and repurposes the material into affordable, innovative products.

http://www.terracycle.com/

Upcycle Studio

Products are made from locally sourced recycled or ‘up-cycled’ materials keeping lots of waste out of the landfills.

http://www.upcyclestudio.com.au

Sources: ‘Upcycling becomes a treasure trove for green business ideas’ by Jennifer Wang, Entrepreneur magazine, ª 2011; ‘Types of businesses to start: Upcycling’ by Nicol, T. L., Entrepreneur Magazine, SA; and Directory of Upcyclers, The Upcycle Movement, ª 2012.

• equal opportunity and community participation/sustainable community • conservation of biodiversity and ecological integrity • ensuring intergenerational equity • recognising the global integration of localities • a commitment to best practices • no net loss of human capital or natural capital • the principle of continuous improvement • the need for good governance.73 In particular, the natural advantage of nations approach engages business and government through discussion of innovation, competitive advantage, business theory, strategy development and industry

Chapter 3: Entrepreneurship and sustainable development 93

policy. It does this without losing sight of the environmental purpose, and by illustrating that the drive for an ecologically sustainable world does not have to be in conflict with economics and business practices.

De-growth entrepreneurship Entrepreneurs normally focus on growth, bigger, better, more. Is there a ‘growth market’ for ‘de-growth entrepreneurs’ in the future? (See ‘Ways to profit from de-growth’ below.) De-growth is a political, economic and social movement based on ecological economics that confront traditional entrepreneurial ideas of consumerism and capitalism. Why must entrepreneurs always be growth-oriented? With humanity using one and a half Earths worth of biocapacity every year,74 if we want to stabilise our ecosystem, can we afford such a vastly growing population and economy? In essence, de-growth is an approach that responds to the limits-to-growth argument75 through the need to downscale production and consumption because overconsumption lies at the root of long-term environmental issues and social inequalities. De-growth need not mean a decrease in wellbeing, or indeed of individual profit.76

WAYS TO PROFIT FROM DE-GROWTH Are there not ways to profit from de-growth? Australia’s energy-retrofit industry can certainly attest to that. Some business sectors can actually flourish with de-growth: •

• •

•

ENTREPRENEURSHIP

Multigenerational housing: Those first adopters that start selling multigenerational housing IN PRACTICE or that retrofit houses or properties to make them multigenerational friendly will stand to prosper in this transition. Gardening suppliers: Certainly new ventures focused on seeds, shovels and farming will thrive. Entomophagy: (consumption of insects as food) is another possible entrepreneurial opportunity as water-hungry beef production makes such meat too expensive. Of course the cultural taboo on insect consumption will have to be dealt with. Green burial: Cemeteries are highly toxic in some cultures with formaldehyde penetrating into water tables and native trees being removed. New forms of burial could create ‘carbon sinks’ that sequester carbon, lower costs and promote biodiversity. Source: Adapted from Erik Assadourian, ‘Finding ways to sell degrowth – and profit in the process’, Published by State of the World 2013: Is Sustainability Still Possible?, ª 2013, 2014. http://blogs.worldwatch.org/sustainabilitypossible/finding-ways-to-sell-degrowth; see also ‘De-growth America 2100’, http://blog.postwachstum.de/degrowth-america-2100-20140521.

Natural capitalism and the ecology of commerce Natural capital, (see ‘What are the forms of entrepreneurial capital?’ on pages 498-9) is the common heritage that we received from past Nature’s work. Its integrity was preserved by the careful use and stewardship of the previous generations. But all this is now at risk. Its exploitation in support of unsustainable economic growth driven by global markets generates a fragile wealth in favour of a minority of the world population. Authoritative studies warn about the crucial role of natural capital and ecosystem services that must be preserved for the wellbeing of the whole planet and passed to the next generations.77 Creating the Next Industrial Revolution is a 1999 book co-authored by Paul Hawken, Amory Lovins and Hunter Lovins. The authors view the world’s economy as part of the larger economy of natural resources and the ecosystem services that sustain it. Only through recognising this essential relationship between the Earth’s valuable resources and the business environment can entrepreneurs gain advantage and prosper. According to the authors, the next industrial revolution depends on four

Insect entrepreneur launches ‘triple bottom line’ business. Are you sickened? Read more on CourseMate Express.

How can companies compensate Earth for services and products that she provides? Find out on CourseMate Express.

94 Part 1: Entrepreneurship in the twenty-first century

central strategies: (1) the conservation of resources through more effective manufacturing processes; (2) the reuse of materials as found in natural systems on biological models with closed loops and zero waste; (3) a change in values from quantity to quality; for example, shifting from the sale of goods like light bulbs, to the provision of services (illumination); and (4) investing in natural capital, or restoring and sustaining natural resources. Paul Hawken’s book The Ecology of Commerce also contributes to this framework. When we say ecology of commerce we focus on how the human uses of the Earth are threatening not just future uses but also the biological bases of human reproduction. The solution to this threat is, incredibly, the market. The dynamics of the market itself, and particularly its generation of technical and organisational innovation, can be used not simply to slow the progress of environmental degradation but also to reverse it, by making waste and pollution costly and by creating commercial value in ecological integrity. Another work in this genre is Bill McKibben’s book Deep Economy: The Wealth of Communities and the Durable Future with its roots in deep ecology, which describes the integration of human beings and the environment and ascribes greater value to the non-human aspects of the ecosystem. Hawken, Lovins and Lovins’ Natural Capitalism reconciles the ecological and economic approaches so that protecting the Earth’s environment makes good business sense. Natural capital comprises the world’s resources, living systems and ecosystem services. Lovins now advocates for ‘climate capitalism’ to demonstrate how businesses in a variety of industries are adapting to climate change by adopting policies of environmental sustainability.78

Cradle-to-cradle (C2C) design In the book Cradle-to-Cradle, McDonough and Braungart envision a world without waste, a world without poisons and a world in which all materials are continuously recycled. It already exists. We call it nature. In the natural system there is no waste and the same materials have been recycled for billions of years. The new industrial revolution is all about absorbing the lessons we should have learned from nature long ago. The key to sustainability is making the market work for the environment instead of against it.79 In the cradle-to-cradle model, ‘nutrients’ feed the production process (see Figure 3.12). Technical nutrients are non-toxic, non-harmful synthetic materials that do not harm the natural environment. They should be continuously useful (recyclable) over repeated production without losing their integrity or quality. Some will ultimately be ‘downcycled’ into lesser products, and will finally become waste. Biological nutrients are organic materials that are compostable so that they ultimately will provide food for small life forms without affecting the natural environment. The two types of ‘production nutrients’ each follow their own cycle in the regenerative economy. Cradle-to-cradle suggests that entrepreneurs must protect and enrich ecosystems, making them not just efficient but essentially waste free. The model in its broadest sense is not limited to industrial design and manufacturing; it can be applied to many different aspects of human civilisation such as urban environments, buildings, economics and social systems. Like the Earth’s nutrient cycles the flow of materials eliminates the concept of waste (cradle-to-cradle, rather than cradle-to-grave). Each material in a product is designed to be safe and effective, as well as to provide quality resources for subsequent generations of products; in other words, materials are conceived as nutrients and designed to circulate safely and productively.

Chapter 3: Entrepreneurship and sustainable development 95

plants

biological

nutrients

FIGURE 3.12 BIOLOGICAL AND TECHNICAL NUTRIENTS IN THE CRADLE-TOCRADLE DESIGN FRAMEWORK

organic and synthetic materials raw materials disassembly organic and waste products separation animal consumption

technical

manufacture product decomposers

5 criteria

1 100% renewable energy use 2 Water stewardship Clean water output 3 Social responsibility Positive impact on community 4 Material reutilisation Recyclability/compostability 5 Material health Impact on humans and environment

Source: Wikipedia Commons, ‘Biological and Technical Nutrients’.

The Natural Step During the transition from rampant exploitation of the planet towards sustainable cultivation of resources, entrepreneurs must address the complexity and the dynamics of ecosystems and climate in relation to social activity. They will, of course, also face the traditional complexity and dynamics within society, such as the pace of technological change, the uncertainty of consumer expectations and the unpredictability of new regulations. Making intelligent decisions in a complex, dynamic and uncertain system invariably requires system thinking. When the overall principles have been identified, all the details in the system can be related to them. Starting from this reasoning, a process called ‘The Natural Step’ was begun in Sweden in 1989 in which scientists tried to identify what they were able to agree on (rather than what they disagreed on) regarding sustainability. This led to the formulation of four non-overlapping principles for sustainability.80 The principles are used as a non-prescriptive starting point for system thinking about sustainability. Starting from the principles, different actors within science, business, organisations and municipalities (who are experts within their own fields) ask themselves relevant questions and draw conclusions about what these principles will imply for their specific activities. The principles have also been used in strategic planning in a large number of corporations with differing fields of activities; for instance, manufacturers such as Interface, Electrolux and JM Constructions; trading companies such as IKEA and Hemkop; and service companies such as Swedish McDonald’s and Scandic Hotels. They are also used by a growing number of municipal authorities. See Chapter 11, page 400 for more details about ‘The Natural Step’.

How carpet manufacturer Interface is building a more sustainable world. Read the case on CourseMate Express.

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Industrial metabolism Let us take the word ‘industry’ to mean a ‘balanced, quasi-stable collection of interdependent firms belonging to the same economy’.81 Then, the word ‘metabolism’ usually refers to the internal processes of a living organism that are necessary for the maintenance of life. Combining the two using a biological analogy, industrial metabolism (IM) was first proposed by Robert Ayres as ‘the whole integrated collection of physical processes that convert raw materials and energy, plus labour, into finished products and wastes’,82 just like a living organism. Labour input and consumer output act as the human components. Both industrial metabolism and ecological metabolism are examples of dissipative systems, which are self-stabilising. A manufacturing enterprise or company may also be described as a self-organising entity, and the concept of industrial metabolism again applies. IM focuses on developing networks of industries that create eco-efficiencies and eco-interdependencies. They create a permanent waste exchange system where the by-product of one company becomes the raw material for another.

Lean Six Sigma and the eight wastes This framework asserts that the expenditure of resources for any goal other than the creation of value for the end customer is wasteful and should be eliminated. Lean manufacturing is a philosophy generally associated with the Toyota Production System (TPS). It is renowned for its focus on reducing the original Toyota seven wastes in order to improve overall customer value. Six Sigma, originally developed with Motorola, further developed the list of wastes (see Figure 3.13). Lean is simply a method of streamlining a process by removing ‘waste’, which is activity not required to complete a process. • Defects: Products or services that are out of specification that require resources to correct. • Overproduction: Producing too much of a product before it is ready to be sold. • Waiting: Waiting for the previous step in the process to complete. • Non-utilised talent: Employees that are not effectively engaged in the process. • Transportation: Transporting items or information that is not required to perform the process from one location to another. • Inventory: Inventory or information that is sitting idle (not being processed). FIGURE 3.13 THE EIGHT WASTES

Defects

Overproduction

Waiting

Non-utilised talent

Efforts caused by Production that is Wasted time waiting Underutilising rework, scrap and more than needed or for the next step people’s talents, incorrect information. before it is needed. in a process. skills and knowledge.

Transportation

Inventory

Unnecessary Excess products movements of and materials not products and materials. being processed.

Motion

Extra-processing

More work or higher Unnecessary movements by quality than is required people (e.g. walking). by the customer.

Source: ‘The 8 Wastes from GoLeanSixSigma’, pp 2. Copyright, ª 2012 by GoLeanSixSigma.com. Used by permission.

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• Motion: People, information or equipment making unnecessary motion due to workspace layout, ergonomic issues or searching for misplaced items. • Extra processing: Performing any activity that is not necessary to produce a functioning product or service.83

Darwinian theory of entrepreneurship and climate change The following is a ‘You read it here first’ idea that combines entrepreneurship, the economy and climate change into a new field called generalised Darwinism.84 Darwinian evolution of the entrepreneurial spirit plays a significant role in the process of economic development. Just like selected evolving organisms in biological systems, entrepreneurs are at the cutting edge of developing, retaining and selecting information useful to survival. Risk-tolerant, growth-promoting traits generate an evolutionary advantage and their increased occurrence in the gene pool accelerates the pace of technological progress and the process of economic development. These compete, however, with riskaverse traits, which also temporarily gain evolutionary advantage, diminishing the growth potential of advanced economies. This view believes that there is a higher representation of entrepreneurial traits among lower income individuals. During the Industrial Revolution, it was not the landed aristocracy who led the innovation because there was a low representation of growth promoting entrepreneurial traits within the landed gentry compared to the middle and the lower classes.85 Joseph Schumpeter wrote the famous book Theory of Economic Development (1911, transl. 1934), which in German was Theorie der Wirtschaftlichen Entwicklung. The German word ‘Entwicklung’ can be translated as development or evolution. The translators of the day used the word ‘development’ from the French ‘de´veloppement’, as opposed to ‘evolution’ as this was used by Darwin.86 Using those words, Schumpeter actually proposed an idea radical for its time: evolutionary entrepreneurship. The economy evolves perpetually as the equilibrium is destroyed by entrepreneurs who introduce innovations. A successful introduction of an innovation disturbs the normal flow of economic life, because it forces some of the already existing technologies and means of production to lose their positions within the economy. How does evolutionary entrepreneurship relate to climate change? Entrepreneurs are the humans who naturally select for advantage. Entrepreneurs create value out of states of uncertainty. An entrepreneur can overcome a constraint, rather than being limited by it, for example, by shifting resources, by making resource substitutions, by bringing new technologies or business models to bear on the problem, or by new forms of contracts, organisations or institutions.87 An environmental constraint can, therefore, function as an incentive within which entrepreneurial agents can see opportunities. There are many examples of the operation of this ‘entrepreneurial loop’ in evolutionary economics and in the related field of innovation economics. There is no reason why such a loop should not also operate at the interface of economic and ecological dynamics. Entrepreneurs sometimes cause environmental stress when they lay bare Earth’s resources as they seek profit and advantage; they also respond to the value creating opportunities that such stresses offer. Therefore, we can have a process of cumulative causation where entrepreneurial activity, in states of uncertainty, leads to unintended negative environmental effects which, when revealed, stimulate entrepreneurial activity that mitigates such effects.88 These tendencies are connected: a widespread expectation of ecological destruction alerts entrepreneurs to opportunities.89 If entrepreneurship is, indeed, responsive to environmental degradation, it can be argued that a co-evolutionary connection exists between economic and ecological systems. This co-evolution centres upon the growth of

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knowledge about environmental degradation and the capacities of entrepreneurs to take the opportunities that are presented.90

Gaiapreneurship Would you believe entrepreneurs are planning to mine the Moon in order to save Earth? Learn more on CourseMate Express.

You won’t find it in Google (yet), but let’s end with a far-out concept – gaiapreneurship. Gaia was the Greek Goddess of Earth. Gaia was the nourisher of all things and brought about life on Earth. In today’s terms, we would say Gaia is the metaphorical force that nourishes all life forms and maintains the conditions for continued survival and prosperity. Jamie Lovelock’s ‘Gaia hypothesis’ was originally proposed in an article in Nature in 1965.91 Now increasingly validated and called a theory, this notion is that life does not merely react and adjust to changing conditions; it also acts systematically and collectively to positively shape conditions to its own advantage. As an example, Gaia identifies toxic carbon dioxide, pumps it out of the atmosphere and sequesters it in plants and underground. Is this not a definition of an entrepreneur? Do not positive entrepreneurs act in such a way to maintain the conditions for the continued survival, flourishing and prosperity of humanity? Of course, entrepreneurs throughout history have had a dark side. There are two choices. Entrepreneurs can either create the conditions to continue the Earth’s life-support services and selfmaintenance functions or they can exploit and plunder the planet unsustainably. They acted the roles of both Gaia and her evil cousin Medea, the destructive wife of the ancient hero Jason the Argonaut. Jason abandoned Medea to marry King Creon’s daughter, and so Medea took revenge by poisoning the king and his daughter, murdering her two children by Jason, and then flying off to the Sun on a pair of dragons.

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SUMMARY We began this chapter by examining how our times are so fraught with crisis. But even during crisis, entrepreneurial people with creative solutions can step forward to help save the planet and generate economic prosperity. Innovation sometimes happens when we see failure in the system. Schumpeter appreciated these ‘cold showers’ in the economy that release new waves of creativity. Today we also are engaged in a great climate war and an economic calamity, but to entrepreneurs, ‘perseverance in adversity’ is music to their ears. As the I Ching says, ‘Perseverance furthers’. The Asia–Pacific region accounts for over 60 per cent of the world’s total population. From Asia’s mega-cities down to the Pacific islands, the effects of climate change are significantly damaging our ecosystems. We are facing a severe water crisis, especially in safe drinking water and sanitation. Agriculture is responsible for one-third of toxic emissions. Humans have caused the mass extinction of thousands of species and the greatest damage to biodiversity has been done by entrepreneurs in the rainforests. Some of the world’s most successful entrepreneurs, innovators and inventors are responsible for the planet’s utter dependence on fossil fuels. Sadly, resource depletion and overpopulation are both products of the enterprising spirit. We then went on to discuss climate change economics. Market failures not only deplete and destroy the environment, but they also sometimes actually motivate environmentally degrading behaviour. Entrepreneurs can cause negative externalities, where costs to the environment spill over onto the consumer and the public, leading to the ‘tragedy of the commons’. The prisoner’s dilemma game reveals some important ways forward for norm entrepreneurs. Peak resource theory applies to any resource that can be harvested faster than it can be replaced. This leads to the dilemma of simply mitigating risk versus truly adapting to a hotter future. Climate risk analysis must now be part of the way entrepreneurs evaluate their activities. Global warming affects the bottom line because it affects how we analyse cost versus benefit. It leads even to the cold-hearted analysis of the social discount rate of losing millions of people due to rising oceans. The chapter then moved on to look more deeply at entrepreneurial ecology. Research evidence argues that opportunities are inherent even in times of crisis, market failure and environmental decline. Yet from the nineteenth century, industrial entrepreneurship carried out the mass extraction of scarce resources without regard to consequences. Entrepreneurs greatly undervalued biodiversity and ecosystems. Sustainable entrepreneurship takes into account the living dimension of products and services. Entrepreneurs must seek net positive entrepreneurial impact loops with the biosphere. Positive entrepreneurship eliminates designed waste, duplication, disposability, planned obsolescence and wasteful end purposes. Positive entrepreneurs create net positive impact loop systems and innovations that create levers for biophysical improvements and social transformation. Certain conceptual frameworks help us look at entrepreneurial ecology. Natural capitalism looks at the larger economy of natural resources and the ecosystem. Some countries actually seek the ‘natural advantage of nations’. We examined how entrepreneurs could even benefit in an era of ‘de-growth’. Cradle-to-cradle design shows how to create a world without waste. We can even imagine an entrepreneurial metabolism that brings together the Earth’s physical processes with human enterprise. We examined ways of removing ‘waste’, which is any activity not required in the production process. We ended the chapter with two fairly ‘out there’ concepts. Darwinian evolution of entrepreneurial spirit adds to the gene pool those humans who accelerate the pace of technological progress and the process of economic development. Gaiapreneurs are those who act systematically and collectively to positively shape conditions to the Earth’s advantage. In all of these, entrepreneurship is central to transformation.

KEY TERMS AND CONCEPTS 9/11 attacks adaptation anthropocene extinction event biobanking biodiversity biodiversity offsets

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biomass biosphere bioprospecting Brundtland Report carbon sequestration climate change

Review key terms with interactive flashcards

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climate change economics deforestation desertification dotcom crash down-cycling ecology of commerce econosphere ecosystem ecotourism Eisenhower recession embodied water entomophagy entrepreneurial ecocide entrepreneurial ecology entrepreneurial impact loops entropy Entwicklung First Gulf War food entrepreneurs fossil fuels free-rider

gaiapreneurship generalised Darwinism global financial crisis global warming Great Depression hydropreneurs industrial entrepreneurship industrial metabolism (IM) inertia market capitalisation market failure mega-cities mitigation natural advantage of nations natural capital necessity entrepreneur negative entrepreneurship negative externality norm entrepreneur opportunity space

payments for ecosystem services (PES) peak resource theory positive entrepreneurship positive externality reducing emissions from deforestation and forest degradation (REDD) resource depletion social discount rate sociosphere species banking sustainable entrepreneurship (SE) The Natural Step tragedy of the commons Universal Declaration of Human Rights (UDHR) up-cycling Vietnam War

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9

10 11 12 13 14

The book talks about ‘entrepreneurship as if the planet mattered’? In your view, what is the exact opposite of this worldview? In your own country, what evidence is there in recent years that entrepreneurial activity helped bring the economy out of recession? How is the Asia–Pacific region faring as far as climate change is concerned? What is a necessity entrepreneur and how is this connected to population growth? What are opportunities you can name for entrepreneurs in terms of changing world populations? Are entrepreneurs responsible for global warming? What animals in your area are victims of the anthropocene extinction event? Can you describe an environmental market failure in your area? Name three business ideas that show your understanding of ‘social discount rate’. For example, ‘beachfront property development along the Tasman Sea will employ and house people today, but one hundred years from now our descendants will come to grips with property and asset loss as a result of the rise on ocean levels’. Name pairs of entrepreneurial ventures that demonstrate the difference between industrial entrepreneurship and sustainable entrepreneurship; for example, Hertz and Uber. What part of your life belongs to the biosphere? To the sociosphere? To the econosphere? Name three products that express positive entrepreneurship and three for negative entrepreneurship. Give three good examples of up-cycled products. Entrepreneurs are creating new frameworks of entrepreneurial ecology every day. Just think of Airbnb and Uber. Can you name some other entrepreneurial ventures that are creating this kind of redefinition?

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EXPERIENCING ENTREPRENEURSHIP How to read The Economist Some people believe that The Economist is the greatest magazine in the world. It is required reading for every aspiring entrepreneur. The scope of reporting spans the globe from the Tamil Tigers in Sri Lanka to the furniture industry of North Carolina. But it is the back few pages of each edition called ‘Weekly Indicators’ that are the most important for globally oriented entrepreneurs. Using either the magazine itself or the website http://www.economist.com/markets/indicators/, study the following information and answer the questions below.

World markets Market index Market measures consist of weighted values of the components that make up certain lists of companies. The stock market index tracks the performance of certain stocks by weighting them according to their prices and the number of outstanding shares by a particular formula. The Commodities (Price) Index assigns weighted averages to such commodities as energy, precious metals, base metals or futures contracts known as ‘softs’. In different columns you may also see The Economist ‘Commodity Price Index’ and the ‘Markets’ index.

Output, prices and jobs Gross domestic product A country’s gross domestic product, or GDP, is one of several measures of the size of its economy. The most common approach to measuring and understanding GDP is the expenditure method: GDP ¼ consumption þ investment þ exports  imports ‘Gross’ means that depreciation of capital stock is included. Without depreciation, with net investment instead of gross investment, it is the net domestic product. Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called net exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic production not consumed at home (the exports). Industrial production This is a key economic indicator that relates to the total output of all factories, mines and utilities. Monthly per cent changes in the index reflect the rate of change in output. Changes in industrial production are widely followed as a major indicator of strength in the manufacturing sector. Consumer prices This is what people are usually thinking of when they worry about inflation. This is the price paid by whomever finally consumes goods or services, as opposed to the price paid by companies at various stages of the production process (see, for example, factory prices). Unemployment rate This represents people who were not employed during that week, but who were actively seeking work, waiting to be called back to a job from which they were laid off, or waiting to report within 30 days to a new payroll job. This is a measure of the number of workers that want to work but do not have jobs.

Foreign reserves Foreign exchange reserves are the foreign currency deposits held by central banks and monetary authorities. These are assets of the central banks which are held in different reserve currencies, such as the dollar, euro and yen and which are used to back its liabilities; for example, the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. The purpose of reserves is to allow central banks an additional means to stabilise the

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issued currency from excessive volatility, and protect the monetary system from shock, such as from currency traders engaged in buying an asset and quickly reselling (or ‘flipping’) it for profit. Large reserves are often seen as a strength as it indicates the backing a currency has. Low or falling reserves may be indicative of an imminent bank run on the currency or default, such as in a currency crisis.

Money and interest rates Money supply This is the amount of money (coins, paper currency and cheque accounts) that is in circulation in the economy. If there is too much money in the economy, interest rates tend to go down while inflation tends to rise. Conversely, if there is too little money in the economy, interest rates tend to go up and prices and production tend to go down. This can cause unemployment and idle plant capacity.

Trade, exchange rates, budget balances and interest rates Trade balance Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. They form part of the balance of payments, which also includes other transactions such as the international investment position. Current account balance This very important figure is the difference between the nation’s total exports of goods, services and transfers and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities. The current account balance helps a country to evaluate its competitive strengths and weaknesses and to forecast the strength of its currency. Currency units This is the same as the exchange rate in US dollars over two time periods. Budget balance percentage of GDP This measures how much of the annual GDP is made up by the government’s budget. Interest rate This is the cost of borrowing money, expressed as a percentage, usually over a period of one year. For example, when the mortgage balance is $100 000, and the interest rate is 6 per cent, one single annual payment will include $6000 interest.

Retail sales, producer prices, wages and exchange rates Retail sales Key components of retail sales include cars, building materials, furniture, department store sales, food store sales, petrol, clothing, restaurant sales and pharmacy sales. High retail sales are an indication of economic growth and an expanding economy. In commerce, a retailer buys goods or products in large quantities from manufacturers or importers, either directly or through a wholesaler, and then sells individual items or small quantities to the general public or end user customers, usually in a shop, also called a store. Retailers are at the end of the supply chain. Marketers see retailing as part of their overall distribution strategy. Producer prices This measure contains data on prices by stage of processing, sector, industry and commodity. Price increases that wholesalers and manufacturers are paying now cause consumer price increases in products and services later. Wages/earnings A wage is the amount of money paid for some specified quantity of labour. When expressed with respect to time (usually per hour), it is typically called the wage rate, and is specified in pre-tax amounts. It is often the main monetary item upon which the worker and the employer focus when negotiating an employment contract.

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Trade-weighted exchange rate This is a given country’s exchange rate with the currencies of its trading partners weighted by the amount of trade done by the country in each currency. A trade-weighted currency index is a weighted average of a basket of currencies that reflects the importance of a country’s trade (imports and exports) with these countries. Sometimes a trade-weighted currency index is taken as a crude measure of a country’s international competitiveness.

Big Mac Index Burgernomics is based on the theory of purchasing-power parity (PPP), the notion that a dollar should buy the same amount in all countries. Therefore, in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our ‘basket’ is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is undervalued or overvalued.

Questions 1 2 3 4 5 6 7 8 9 10

Which world share market is doing best right now? Which stock (share) has dropped the most? How is the price of cocoa tracking? What are the trends in world oil prices? What is the price of one barrel of West Texas Intermediate crude oil? Which country has the highest predicted increase in GDP from this year to the next? Which country has the lowest GDP growth and which has the highest? Which region of the world has the lowest industrial production? Which country has the highest and which has the lowest trade balance? Which country has the highest budget balance as per cent of GDP? Based upon interest rates, where would you ideally invest your money? 11 Which country, Australia or New Zealand, is doing better in retail sales volume? 12 In which country, Australia or New Zealand, is a Big Mac sold at the best value? Which is the worst? 13 Make up five more questions that could be added to this exercise.

CASE STUDIES CASE 3.1

Go online to complete the read the Experience Entrepreneurship ‘Clean green factory’ and complete the activities

Russ George: Save the world and make a little money on the side While politicians at climate change summits debate how much to reduce carbon emissions, one pioneering entrepreneur saw huge opportunities to ‘just do it’. Geo-engineering entrepreneur Russ George decided to take the planet’s rescue into his own hands. He is best known for his San Francisco-based start-up firm Planktos Inc., which claims to ‘restore ecosystems and slow climate change [by] removing CO2 from our oceans and atmosphere by healing the seas, growing new climate forests, and erasing carbon footprints’. His mantra: ‘Save the world and make a little money on the side’. To understand Russ’s great entrepreneurial opportunity, first a bit of background. WHAT IS A GEO-ENGINEERING ENTREPRENEUR? Scientists and entrepreneurs have been developing what are known as geo-engineering technologies that could mitigate climate change. As a carrot, Richard Branson offers geo-engineering entrepreneurs what he calls the ‘Virgin Earth Challenge’, a $25 million award to commercialisers who can remove significant amounts of greenhouse gases from the atmosphere. (Note: it has not yet been awarded.) Geo-engineering is defined as the ‘deliberate large-scale intervention in the Earth’s natural systems to counteract climate change’. The two broadest areas of geo-engineering remediation focus on solar radiation and carbon dioxide removal. Here are some of the methods that entrepreneurs could use to geo-engineer the planet:

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MANAGING AND REDUCING SOLAR RADIATION • Changing the Earth’s reflectivity through space-based or ground-based reflectors, or by changing the clouds or the land’s surface so that more of the sun’s heat is reflected back into space. • Stratospheric aerosols: Introducing small, reflective particles into the atmosphere to reflect sunlight back into space. This mimics the natural cooling effect of volcanic clouds that cooled the Earth during the age of dinosaurs. CARBON DIOXIDE REMOVAL • Afforestation: Global-scale tree-planting efforts or using artificial ‘trees’ with artificial resin to absorb CO2. • Biochar: Burning biomass (plant material) and burying it so that its carbon is locked up in the soil. • Ambient air capture: Building machines that can remove CO2 directly from the air and store it elsewhere. • Enhanced weathering: Exposing larger quantities of minerals that react with CO2 and storing the resulting compounds in the oceans or soil. RUSS GEORGE’S BIG IDEA The technique that most interested Russ George and his team at Planktos Inc. was one of the carbon removal ideas known as ocean fertilisation. This means adding iron – the sort used to improve lawns – to the ocean in order to increase the activity of phytoplanktons, the microscopic plants that form the foundation of the marine food chain. The idea is to increase photosynthesis, thereby drawing CO2 from the atmosphere, eventually sequestering carbon, and sinking it to the bottom of the ocean (see Figure 3.14). Russ’s business model was to sell commercial carbon offsets to other polluters for each tonne of sequestered carbon that Plantos achieved. Sale of carbon offset certificates allows companies to compensate for their emissions made elsewhere. FIGURE 3.14

SINKING CO2 TO THE BOTTOM OF THE OCEAN

CO2

CO2

particulate

dissolved

Upwelling

anorganic

anorganic

organic

Cooling

Sedimentation Deepwater circulation

Carbonate

Organic carbon

Carbonate CaCO3

Source: Hannes Grobe, Alfred Wegener Institute for Polar and Marine Research, Bremerhaven, Germany, ª 2006.

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FIRST FAILED TRIAL In March 2007, Russ George announced plans to dump tens of thousands of kilograms of tiny iron particles near the Galapagos Islands. In efforts to stop Planktos, lobbying groups filed a formal request to the US Environmental Protection Agency (EPA) to investigate their activities and regulate them under the US Ocean Dumping Act. In addition, public interest organisations asked the Securities Exchange Commission (SEC) to investigate Planktos’s misleading statements to potential investors regarding the legality and purported environmental benefits of their actions. Hit with negative publicity, Planktos announced in February 2008 it was postponing its plans in the Galapagos because of a ‘highly effective disinformation campaign waged by anti-offset crusaders’. The EPA warned Russ that flying a US flag for his Galapagos project would violate US laws. Planktos announced bankruptcy, sold its vessel and dismissed its employees. SUCCESSFUL GEO-ENGINEERING EXPERIMENT Undeterred, Russ left Planktos (although he is apparently still a shareholder) and in 2012 he launched the Haida Salmon Restoration Corporation (HSRC). He convinced the Haida indigenous Canadians, for whom salmon harvesting was a traditional way of life, to invest $2.5 million of their own savings. The investors hoped this geo-engineering business would stimulate plankton and thus replenish the fish population while at the same time securing millions of dollars’ worth of carbon offsets that could be sold on the international market. Russ based his project on some solid scientific research. Williamson et. al. had estimated that widespread ocean fertilisation over the course of a century could remove 10 per cent of the carbon that humans are expected produce.92 Smetacek and colleagues found that a man-made algae bloom near Antarctica did successfully sequester carbon on the ocean floor.93 FIGURE 3.15

THE HAIDA EDDIES OFF THE COAST OF BRITISH COLUMBIA

Source: SeaWiFS image courtesy the SeaWiFS Project, NASA/Goddard Space Flight Center, and ORBIMAGE.

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Based on this evidence, Russ and his team set sail and poured 120 tonnes of iron-rich dirt into the migration routes of pink and sockeye salmon off the coasts of Alaska and British Columbia over a period of 30 days. The project resulted in a 35 000 km2 plankton bloom bigger than the entire island of Jamaica that lasted for several months, turning the waters cloudy red, thereby adding nutrients to stimulate the bloom of plankton on which fish feed. The resulting 2013 run of pink salmon in Canadian and Alaskan rivers was enormous. Within a few months after the ocean-fertilising operation, NASA satellite images showed a powerful growth of phytoplankton in the waters that received the Haida’s iron. Reportedly, fin, sperm and sei whales, rarely seen in the region, appeared in large numbers, along with killer whales, dolphins, schools of albacore tuna and armies of night-feeding squid. By 2014, the catch had quadrupled. In his blog, Russ reported in 2013: This is wonderful news for the planet. It means that by working with Mother Nature to undo the terrible wrong we have done . . . we can re-purpose millions of tonnes of that deadly CO2 into becoming life itself.. . . hundreds of millions of salmon, each and every one swimming home to us with their carefully recorded lab journals, their very bodies, all reporting that in their world, their ocean pastures have come back to life.

Russ was astounded to see that this ocean seeding resulted in a huge firestorm from the media and politicians. The Canadian government sent a squad of gun-toting Environment Canada agents to raid the headquarters of the offices of the HSRC. In October 2012, the Guardian of London said Russ’ business ‘contravened UN conventions’. Scientific American labelled George a ‘rogue geo-engineer’. Others have called him the entrepreneurial equivalent of an ‘eco-terrorist’. Russ’s big business idea underscored how easy it is for entrepreneurs to manipulate ocean ecosystems. The science and the entrepreneurial business models still need to be worked out. It is true that there is a great deal of uncertainty and concern about the possible down-stream negative impacts of geo-engineering. Aerosols in the atmosphere could cause droughts. Cloud reflectors could affect precipitation and temperatures. Ocean fertilisation could have adverse effects on other ecosystems. However, according to Australian scientist Pete Strutton, in the Haida Eddies ‘no deleterious impacts have been observed’.94 Whether Russ George and the Haida Salmon Restoration Corporation will face legal troubles in the aftermath of the iron dump remains to be seen, but the international rules against such projects are mostly toothless. In any event, the Haida tribe announced it was terminating Russ George in 2013 but a spokesman said, ‘While we are confident in the technology, process and buy-in are key’. QUESTIONS

1 2 3

Would you agree with Michael Specter of the New Yorker magazine that Russ George is a geo-vigilante? Or do you believe that humans do much worse than this every day and so doing something positive is ethical? Would you support sending a rocket into space, spreading a few million tonnes of sulphur dioxide particles, and cooling the earth that way? Which statement do you agree with: a Entrepreneurs are destroyers so it follows that the business activities of entrepreneurs must be severely regulated and that someone must be empowered to do the constraining. b Entrepreneurs are a creative force – we invent resources and improve the world — so we have to defend our liberty to repair the planet.

Sources in addition to those cited: ‘Planktos ecosystems’, http://www.planktos.com/; BBC (2014), ‘Tackling climate change with technology: Engineering’, http://news.bbc.co.uk/2/hi/technology/8338853.stm; Biello, D. (2012), ‘Pacific Ocean hacker speaks out: Is Russ George a ‘‘rogue geoengineer,’’ salmon savior or something else?’, Scientific American, 24 October 2012, http://www.scientificamerican.com/article/questions-and-answers-with-roguegeoengineer-carbon-entrepreneur-russ-george; CNW (2013), ‘Haida announce termination of Russ George’, 23 May 2013, http://www.newswire.ca/en/story/ 1170825/haida-announce-termination-of-russ-george; Crawford, William & Whitney, Frank, ‘Tracking eddies that feed the sea’, Earth Observatory. NASA, http://earthobservatory.nasa.gov/Features/Eddies/eddies.php; Falconer, B. (2014), ‘Can anyone stop the man who will try just about anything to put an end to climate change?’, Pacific Standard, 5 May 2014; Forgey, P. (2013), ‘Booming southeast pink returns fuel Alaska’s biggest salmon harvest ever’, Alaska Dispatch News, 10 October 2013, http://www.adn.com/article/20131010/booming-southeast-pink-returns-fuel-alaskas-biggest-salmon-harvest-ever; Fountain, H. (2012), ‘A rogue climate experiment outrages scientists’, New York Times, 18 October 2012, http://www.nytimes.com/2012/10/19/science/ earth/iron-dumping-experiment-in-pacific-alarms-marine-experts.html?emc¼eta1&_r¼2&; George, R., ‘Save the world make a little money on the side – my mantra’, 4 April 2013; George, Russ (2013), ‘Join me to bring back the fish & ocean life everywhere’, http://russgeorge.net; Gramling, C. (2010), ‘Is it time to invest in entrepreneurial geoengineering?’, Earth: The Science behind the Headlines, http://www.earthmagazine.org/article/it-time-invest-entrepreneurialgeoengineering; Keith Johnson, W. et al. (2005), ‘Iron transport by mesoscale Haida eddies in the Gulf of Alaska’, Deep Sea Research Part II: Topical Studies in Oceanography, 52(7–8), 933–53; Kreiner, T. (2014), ‘Social entrepreneurship and global warming’, http://nextbillion.net/blogpost.aspx?blogid¼3985; Lukacs, M. (2012), ‘World’s biggest geo-engineering experiment ‘‘violates’’ UN rules’, Guardian, 15 October 2012, http://www.theguardian.com/ environment/2012/oct/15/pacific-iron-fertilisation-geoengineering; National Research Council, Committee on Geoengineering Climate; Board on

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Atmospheric Sciences and Climate; Ocean Studies Board; Division on Earth and Life Studies (2015), Climate intervention: Carbon dioxide removal and reliable sequestration. ISBN: 978-0-309-30529-7; National Research Council, Committee on Geoengineering Climate; Board on Atmospheric Sciences and Climate; Ocean Studies Board; Division on Earth and Life Studies (2015), Climate intervention: Reflecting sunlight to cool earth. ISBN 978-0-309-31482-4; Ocean Carbon and Biogeochemistry (OCB), ‘Ocean Fertilization’, http://www.whoi.edu/ocb-fert/page.do?pid¼38315; Oxford Geoengineering Programme, ‘What is geoengineering’, http://www.geoengineering.ox.ac.uk/what-is-geoengineering/what-is-geoengineering; Pappas, S. (2012), ‘Iron dumping in the Pacific Ocean stirs controversy over geoengineering’, Huffington Post,19 October 2012 http://www.huffingtonpost.com/2012/10/19/pacific-ocean-iron-dumpinggeoengineering_n_1986517.html; Parry, W. (2012), ‘Could fertilizing the oceans reduce global warming?’, Livescience,18 July 2012, http:// www.livescience.com/21684-geoengineering-iron-fertilization-climate.html; Shukman, D. (2014), ‘Geo-engineering: Climate fixes could harm billions’, BBC, 26 November 2014, http://www.bbc.com/news/science-environment-30197085; Smetacek, V., et al. (2012), ‘Deep carbon export from a Southern Ocean iron-fertilized diatom bloom’, Nature, 487(7407), 313–19; Specter, M. (2012), ‘The first geo-vigilante’, The New Yorker, 18 October 2012, http:// www.newyorker.com/news/news-desk/the-first-geo-vigilante; Sustainable Agriculture and Food Systems Funders (2010), ‘Geoengineering briefing paper’, http://www.safsf.org/documentsold/Beyond_GE_briefing_papers_final.pdf; U.S. Ocean Carbon and Biogeochemistry (OCB) Program, ‘Statement’, http:// www.whoi.edu/ocb-fert/%20http://www.isisconsortium.org/fileserver.do?id¼134304&pt¼2&p¼79886%20; Whitney, Frank & Robert, Marie (2002), ‘Structure of Haida Eddies and their transport of nutrient from coastal margins into the NE Pacific Ocean’, Journal of Oceanography, 58(5), 715–23; Wikipedia, ‘List of proposed geoengineering schemes’, http://en.wikipedia.org/wiki/ List_of_proposed_geoengineering_schemes; Williamson, P. et al. (2012), ‘Ocean fertilization for geoengineering: A review of effectiveness, environmental impacts and emerging governance’, Process Safety and Environmental Go online to complete Protection, 90(6), 475–88; Zubrin, R. (2014), ‘Geoengineering could turn our long-barren oceans into a bounty’, Case study 3.3 National Review, 22 April 2014, http://www.nationalreview.com/article/376258/pacifics-salmon-are-back-thank‘Sustainable design at Formway furniture’ human-ingenuity-robert-zubrin.

CASE 3.2 The carpet cleaner Ray Anderson’s conversion – what he calls a ‘spear to the heart’ – came in 1994 while he was reading Paul Hawken’s The Ecology of Commerce (see page 93). In it, Hawken argued that business should inspire a more sustainable model that respects, and even mimics, the natural world. Anderson, CEO of carpet maker Interface, was so struck by Hawken’s message that he sent his staff to tally up the resources used by Interface and its suppliers. The results were staggering: 1.2 billion pounds of raw material were extracted from the Earth to produce the roughly $800 million worth of carpeting Interface sold in 1995. Anderson, you might say, was floored. It’s one thing to be green when you make yoghurt, toothpaste or ice cream. But what do you do when your product is made largely from oil, takes 20 000 BTU [British thermal units] of energy per pound to produce, and lasts in the environment for 50 000 years? As Anderson wrote in his widely cited 1998 memoir, Mid-Course Correction, ‘I am a plunderer of the earth and a thief [but] by our civilization’s definition, I am a captain of industry . . . a modern day hero, an entrepreneur’. That dichotomy sums up the challenge facing a sustainable business model. Traditional economic and accounting systems value growth and profit, without much concern for the means. Standard accounting has no place for the forests, oceans, streams and atmosphere, and the services they provide, such as recycling carbon dioxide, producing oxygen, processing waste and generally sustaining life. Nor does a company’s income statement count the depletion of these resources as a cost. ‘The Soviet Union collapsed because it was economically dishonest,’ says Anderson. ‘If we collapse, it will be because we are ecologically dishonest.’ Anderson makes this pronouncement from Interface’s headquarters on the 20th floor of an office tower atop a bluff on the outskirts of Atlanta, Georgia. It was from this vantage point, he says, that General William Tecumseh Sherman watched the city burn during the American Civil War, and it is here that Buddy Hay plots to stave off damage of another sort. A former accountant, Hay is the manager of sustainability operations at Interface. His small but eclectic group – composed of engineers, accountants and an environmental lawyer – monitors Interface’s EcoMetrics (see http:// www.interfaceflor.com.au/Sustainability/EcoMetrics.aspx), or what Hay describes as ‘our metabolism: how much we take in, in raw materials and energy, and what comes out, in the form of products and waste’. Each of Interface’s 15 plants around the world reports on hundreds of EcoMetrics – ranging from employees’ commuting miles to energy usage per unit of product – that Hay and his team analyse quarterly. The metrics serve mainly as internal measures of progress; such efforts barely register in conventional financial circles. ‘Wall Street only cares about one thing, and that’s the bottom line,’ says John Baugh, an analyst who tracks Interface for brokerage firm Stifel Nicolaus & Co. While Baugh admits that Interface’s environmental initiatives appeal to its customers, they don’t factor into his analysis. ‘Did they get a return on the money spent? That’s hard to measure,’ he says.

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By its own measure, Interface has made significant returns on its green investment. Since 1995 the company has eliminated $316 million worth of waste, enough to entirely fund its sustainability efforts. As Hay gets more specific, the numbers fly by: 93 million pounds of material diverted from landfills, enough to carpet the Empire State Building 45 times. The energy used to manufacture each square metre of carpet is down 41 per cent, a saving that, last year, equalled 61 000 barrels of oil. Greenhouse gas emissions are 56 per cent lower – the equivalent of taking 21 000 cars off the road for a year. Water usage is down 73 per cent, one-third of factory smokestacks are shuttered, [and] more than half of all effluent pipes have been closed off. Meanwhile, sales have increased to $1 billion, making Interface the world’s largest seller of modular carpet tiles. The company is almost halfway to its goal of zero waste by 2020, earning it the goodwill of environmentalists and spawning a green office industry. But there have been missteps. When Interface embarked on its first major recycling effort in 1996 – of carpet backing made of vinyl – the assumption, logically enough, was that any recycling was good. Interface sent used carpet off to a contractor, which recycled it into sheets of backing material and shipped it back. But a few years later, when Interface analysed the full lifecycle costs of the program, it found that once the contractor’s coal-fired process and waste streams were factored in, the recycled product had a greater environmental impact than carpet made of virgin materials. ‘That was a real eye-opener,’ says Paul Firth, Interface’s manager of environmental initiatives. So Interface brought its recycling efforts in-house. One result is the new Cool Blue recycling process at the company’s carpet-backing plant in LaGrange, Georgia, 70 miles from Atlanta. A 300-foot assembly line snakes through the factory floor. It begins with receptacles boldly labelled ‘Cool Blue Food’ – carpet scraps and other plastics that are ground into ‘crumb’. The crumb is fed into what resembles a giant pasta machine, which then spits out plastic pellets that are blown onto a conveyor belt and ferried into a hulking oven where they are pressed into sheets of carpet backing. The whole operation is run on natural gas generated from a local landfill. Life-cycle analysis has also become a standard practice at the company, and Firth, a chemical engineer who joined Interface in 1999 while still in college, is the company’s resident expert. He points to an intricate spiderweb of a chart as he explains that each decision – whether to use a new material, adopt a new process or launch a new product – is meticulously studied for its impact on a dozen or more areas. Energy usage, water usage, global warming potential, ozone depletion and human toxicity are all considered, from the moment raw materials are extracted to the final disposal of a product. This footprint analysis is a powerful tool, but it can sometimes raise perplexing questions. For example, if an alternative material reduces energy use by 50 per cent but introduces a material that could degrade into a dangerous toxin, which is the better choice? Some critics have knocked Interface for using polyvinyl chloride (PVC), which can break down into dioxin, a carcinogen, in its carpet backing. ‘I respect many things Interface has done to reduce its environmental impact, but they are wrong on the PVC issue,’ says Tom Lent, technical policy coordinator at Healthy Building Network. But while other carpet makers have switched to alternatives such as ethyl vinyl acetate (EVA), Interface’s preliminary life-cycle analysis found EVA can be four to five times more toxic than PVC. Gathering data is another issue. ‘The biggest problem is when your supplier doesn’t know,’ says Firth. To get around that, Interface relies on data from governments and consultants that track environmental and toxicity figures. Even when a supplier has analysed its product, there can be complications. Since 2003, Interface has been using polylactide (PLA), a corn-based fibre made by NatureWorks – a subsidiary of food giant Cargill – to supplement nylon in its carpet facing. Replacing oil-intensive nylon with a bio-based renewable material should be a no-brainer, right? But once the resources involved in growing and harvesting the corn are factored in, the picture is hazier. Fertiliser, for example, contributes to aquatic toxicity and acid rain. Firth says, ‘The idea of PLA is great, but it’s not the end-all answer yet’. These issues are thorny enough. But think for a moment of the wider costs – of deploying troops to protect oil interests, for example, or repairing flood damage made more severe by global warming, or medical expenses stemming from pollution-related illnesses. ‘What is the true cost? Can you ever really say?’ asks Hay. Maybe not. But unlike most companies, Interface has taken great steps to try. And lately, Anderson has been busy fielding calls from other business leaders who are beginning to grapple with the same questions. Interface has created a new consulting group, Raise, to help other organisations starting down the path to sustainability. Anderson sees this as a key step toward his goal of turning Interface into a ‘restorative company’. One of his clients is Wal-Mart. Source: Amy Cortese, ‘The carpet cleaner’, Mother Jones (31)6, Nov/Dec 2006: 56–7, Copyright ª 2009 by Mother Jones. Used by permission.

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ENDNOTES 1 Vidal, J. (2014). Indonesia’s forest fires feed ‘brown cloud’ of pollution choking Asia’s cities. The Guardian (UK), 23 March 2014, http://gu.com/p/3nmkp; Fildes, A. The burning season: Study guide, http://www.theburning seasonmovie.com/students-teachers/p/ 103.html. 2 Inter-Governmental Panel on Climate Change. Climate Change 2014: Impacts, Adaptation, and Vulnerability: Technical

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Summary. Geneva: Inter-Governmental Panel on Climate Change, 2014. 3 World Wildlife Federation. (2014). Borneo and Sumatra: Threats, http:// www.worldwildlife.org/what/ wherewework/borneo/threats.html. 4 Van Praag, C. M. & Versloot, P. H. (2007). What is the value of entrepreneurship? A review of recent research. Small Business Economics, 29(4), 351–82. doi: 10.1007/s11187-0079074-x.

5 Baumol, W. J. (2005). Education for innovation: Entrepreneurial breakthroughs versus corporate incremental improvements. NBER Innovation Policy & the Economy (MIT Press), 5(1), 33–56. 6 Schramm, C., cited in Sharma, P. (2008). In a recession, entrepreneurs hold the key to a fast recovery. 23 December, http://www.3dsyndication.com/dna/ article/DNBAN993.

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7 Bullough, A. & Renko, M. (2013). Entrepreneurial resilience during challenging times. Business Horizons 56(3), 343–50. 8 Fairlie, R. W. (2013). Entrepreneurship, economic conditions, and the Great Recession. Journal of Economics & Management Strategy 22(2), 207–31. 9 Cited in Wooldridge, A. (2009). Global heroes: A special report on entrepreneurship. The Economist, 12 March, 3. 10 National Endowment for Science (2008). Technology and the Arts (NESTA), Attacking the recession, http:// www.nesta.org.uk/attacking-therecession. See also Mahroum, S. (2008). Innovate out of the economic downturn. Business Week, 27 October, http:// www.businessweek.com/stories/2008-1027/innovate-out-of-the-economicdownturnbusinessweek-business-newsstock-market-and-financial-advice. 11 Stern, N. (2007). The economics of climate change: The Stern review. Cambridge: Cambridge University Press. 12 Atkisson, A., Stern review: How climate change is revolutionizing economics. WorldChanging: Change your thinking, http://www.worldchanging. com/archives/005210.html. 13 Stern, N., Stern Review Report on the Economics of Climate Change, http:// web.archive.org/web/20081211182219/ http://www.hm-treasury.gov.uk/ stern_review_final_report.htm. 14 Global Commission on the Economy and Climate, Better Growth, Better Climate: The New Climate Economy Report, http://newclimateeconomy.report/ misc/downloads. 15 Dagnino, G. B. & Mariani, M. M. (2007). Dynamic gap bridging and realized gap set development: The strategic role of the firm in the coevolution of capability space and opportunity space. In Innovation, industrial dynamics and structural transformation: Schumpeterian legacies, edited by U. Cantner & F. Malerba, 321–41, Berlin and New York: Springer; Schindehutte, M. & Morris, M. H. Advancing strategic entrepreneurship research: The role of complexity science in shifting the paradigm. Entrepreneurship Theory and Practice 33(1) (2009), 241–76. 16 Intergovernmental Panel on Climate Change (IPCC) WGII AR5 Summary for Policymakers, WGII AR5 Phase I Report Launch 1, 31 March 2014, Climate Change 2014: Impacts, Adaptation, and Vulnerability Summary For Policymakers, 29, http://ipcc-wg2.gov/AR5/images/

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future. Oxford: Oxford University Press, 43; MacNeill, J. (2013), Brundtland revisited, Canadian International Council, 4 February, http://opencanada.org/ features/the-think-tank/essays/ brundtland-revisited; Burns, T. R. & Witoszek, N. (2012). Brundtland Report revisited: Toward a new humanist agenda. Journal of Human Ecology 39(2), 155–70. 62 Nagler, J. (2012). Entrepreneurs: The world needs you. Thunderbird International Business Review 54(1), 3–5; Patchell, J. & R. Hayter (2013). How big business can save the climate. Foreign Affairs 92(5), 17–22; Lowitt, E. (2014). How to survive climate change and still run a thriving business. (Cover Story). Harvard Business Review 92(4), 86–92; Rodgers, C. (2010). Sustainable entrepreneurship in SMEs: A case study analysis. Corporate Social Responsibility & Environmental Management, 17(3), 125–32; Grisham, T. (2009). Leading sustainability. World Review of Entrepreneurship, Management and Sustainable Development, 5(1), January, 42–55; Dean, T. J. & McMullen, J. S. (2007). Toward a theory of sustainable entrepreneurship: Reducing environmental degradation through entrepreneurial action. Journal of Business Venturing, 22(1), January, 50–76. 63 This section has been influenced by J. Birkland, Positive development, Earthscan, 2008; and German Advisory Council on Global Change, World in transition: Conservation and sustainable use of the biosphere, Earthscan, 2001. 64 Shepherd, D. A. & Patzelt, H. (2011). The new field of sustainable entrepreneurship: Studying entrepreneurial action linking ‘what is to be sustained’ with ‘what is to be ‘developed’. Entrepreneurship: Theory & Practice, 35(1), 137–63; See also Kury, K. Wm. (2012). Sustainability meets social entrepreneurship: A path to social change through institutional entrepreneurship. International Journal of Business Insights & Transformation 4, 64–71; Dean, T. J. & McMullen, J. S. (2007). Toward a theory of sustainable entrepreneurship; Cohen, B. & Winn, M. I. (2007). Market imperfections, opportunity and sustainable entrepreneurship. Journal of Business Venturing, 22(1), 29–49. 65 These ‘sphere’ definitions are derived from Boulding, K. E. (1997). Economics as a science. New York: McGraw-Hill Book Company, 1, 11. See also Thomas, C. (2010). The econosphere: What makes the economy really work, how to protect it, and maximize your opportunity for

financial prosperity. Upper Saddle River, NJ: FT Press. 66 Diesendorf, M. & Hamilton, C. (eds). (1997). Human ecology, human economy: Ideas for an ecologically sustainable future. Sydney: Allen & Unwin. 67 Boulding, K. E. (1966). The economics of the coming spaceship earth. In H. Jarrett (ed.), Environmental quality in a growing economy, essays from the sixth RFF Forum. Baltimore: Resources for the Future/Johns Hopkins University Press, 3–14, reprinted in Boulding, K. E. (1968). Beyond economics: Essays on society, religion, and ethics. Ann Arbor: University of Michigan Press, 273–87. 68 This section was greatly inspired by Underwood, D. A. (1998). The institutional origins of crises for economy and ecology. Journal of Economic Issues, 32(2), June, 513–22. 69 Schroedinger, E. (1967). What is life? Mind and matter. Cambridge: Cambridge University Press, 74–5. 70 The term upcycling was coined by William McDonough and Michael Braungart, authors of Cradle to cradle: Remaking the way we make things. See also Wang, J. (2011). Upcycling becomes a treasure trove for green business ideas. Entrepreneur. 22 March. 71 Morris, M. H., Kuratko, D. F. & Schindehutte, M. (2001). Towards integration: Understand entrepreneurship through frameworks. Entrepreneurship and Innovation, February, 37. 72 Porter, M. E. (1990). The competitive advantage of nations. New York: Free Press. 73 Hargroves, K. & Smith, M. H. (eds). (2005). Natural advantage of nations: Business opportunities, innovation and governance in the 21st century. The Natural Edge Project, Earthscan, London. 74 Global Footprint Network, ‘World footprint: Do we fit on the planet?’, http://www.footprintnetwork.org/en/ index.php/gfn/page/world_footprint. 75 Meadows, D. H. & Club of Rome (1072). The limits to growth; a report for the Club of Rome’s project on the predicament of mankind. New York: Universe Books. 76 Eriksson, R. & Andersson, J. O. (2010). Elements of ecological economics. London and New York: Taylor and Francis, Routledge; Kallis, G. (2011). In defence of degrowth. Ecological Economics 70(5), 873–80; Kallis, G., C. Kerschner & J. Martinez-Alier. (2012). The economics of degrowth. Ecological Economics 84(1), 172–80; Klitgaard, K. A. & L. Krall. (2012). Ecological economics, degrowth, and institutional change. Ecological

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Economics 84(1), 247–53; Quilley, S. (2012) System innovation and a new ‘great transformation’: Re-embedding economic life in the context of ‘de-growth’. Journal of Social Entrepreneurship 3(2), 206–29; Rezai, A., L. Taylor & R. Mechler. (2013). Ecological macroeconomics: An application to climate change. Ecological Economics 85(1), 69–76; Tokic, D. (2012). The economic and financial dimensions of degrowth. Ecological Economics 84(1) 49–56; van den Bergh, J. C. J. M. & G. Kallis. (2012). Growth, a-growth or degrowth to stay within planetary boundaries? Journal of Economic Issues 46(4), 909–19; Victor, P. A. (2012). Growth, degrowth and climate change: A scenario analysis. Ecological Economics 84(1), 206–12. 77 Ulgiati, S., Zucaro, A. & Franzese, P. P. (2011). Shared wealth or nobody’s land? The worth of natural capital and ecosystem services. Ecological Economics, 70(4), 778–87. doi: 10.1016/ j.ecolecon.2010.11.015. 78 Desrochers, P. (2002). Natural capitalists’ indictment of traditional capitalism: A reappraisal. Business Strategy and the Environment, 11(4), July, 203–20; Drew, E. (2004). How natural capitalism triggers change. In Business, 26(5), September, 24–8; Forbes, L. C. & J. M. Jermier. (2010). The new corporate environmentalism and the ecology of commerce. Organization & Environment 23(4), 465–81; Hawken, P., Lovins, A. B. & Lovins, L. H. (2010). Natural capitalism: The next industrial revolution. Earthscan; Hawken, P., A. B. Lovins & L. H. Lovins. (2007). Natural capitalism. Bloomsbury Business Library – Management Library; Lovins, A. B., L. H. Lovins & P. Hawken. (2007). A road map for natural capitalism. Harvard Business Review 85(7/8), 172–83; Hopkins, M. S. (2009). What executives don’t get about sustainability (and further notes on the profit motive). MIT Sloan Management Review 51(1), 35–40; Lovins, A. B., Lovins, L. H. & Hawken, P. (1999). Natural capitalism – Creating the next Industrial Revolution. Boston: Little, Brown & Company, republished 2009; Lovins, L. Hunter (2010). Climate capitalism: The business case for climate protection. Pace Environmental Law Review 27(3); Schweickart, David. (2009). Is sustainable capitalism an oxymoron? Perspectives on Global Development & Technology 8(2/3), 559–80; Walton, Rob. (2007). Amory B. Lovins. (Cover Story). Time International (South Pacific Edition), 42, 62–3; White, D. F. (2002). A green

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Industrial Revolution? Sustainable technological innovation in a global age. Environmental Politics, 11(2), 1. 79 Roston, E. (2002). New war on waste. Time South Pacific (Australia/New Zealand edition), 2 September, 48; Webster, K. (2007). Changing the story: ‘cradle-to-cradle’ thinking as a compelling framework for ESD in a globalised world. International Journal of Innovation and Sustainable Development, 2(3–4), 282–98. 80 Holmberg, J., Robert, K.-H. & Eriksson, K.-E. (1996). Socio-ecological principles for a sustainable society: Scientific background and Swedish experience. In R. Costanza, S. Olman & J. Martinez-Alier (eds), Getting down to earth: Practical applications of ecological economics. Washington, DC: Island Press/ International Society of Ecological Economics, 17–48. See also Alexius, Susanna & Staffan Furusten. (2013). Dilemmas of hybrid social enterprises: The case of the Natural Step Sweden; Martin, Diane M. & John W. Schouten. (2013). Sustainable marketing through the Natural Step. Humanistic Marketing, 231; Nattrass, B. (2013). The Natural Step for business: Wealth, ecology & the evolutionary corporation. Gabriola Island: New Society Publishers; Nattrass, B. & Altomare, M. (1999). IKEA: Nothing is impossible. Journal of Business Administration & Policy Analysis, 27–9, January, 429–58; Herbertson, J. & Tipler, C. (2006). The natural step framework: From sustainability fundamentals to innovation. In the International handbook on environmental technology management. Cheltenham, UK; Northampton, MA: Elgar, 210–21; Bradbury, H. & Clair, J. A. (1999). Promoting sustainable organizations with Sweden’s natural step. Academy of Management Executive, 13(4), November, 63–74; Holmberg, J. (2006). Backcasting the natural step: A vision for sustainable societies. Reflections, 7(3), April, 9–14; Robe`rt, Karl-Henrik & Ray Anderson. (2002). The Natural Step story: Seeding a quiet revolution. Gabriola Island: New Society Publishers. 81 Eblen, R. A. & Eblen, W. (1994). Encyclopedia of the environment. Boston: Houghton Mifflin Company. 82 Ayres, R. U. (1989). Industrial metabolism and global change. International Social Science Journal 41(121), 363; Ayres, R. U. Industrial metabolism. In Global Aspects of the Environment. Volume 1, edited by Ayres, R. U., Button, K. & Nijkamp P., 353–79: Elgar Reference Collection. Environmental

Analysis and Economic Policy, vol. 1. Cheltenham, UK. and Northampton, MA: Elgar; distributed by American International Distribution Corporation, Williston, VT, 1999. Reprint, [1989]; Ayres, R. U. Industrial metabolism and the grand nutrient cycles. In Handbook of environmental and resource economics, edited by Jeroen C. J. M. van den Bergh, 912–45: Cheltenham, UK and Northampton, MA: Elgar; distributed by American International Distribution Corporation, Williston, VT, 1999; Baccini, P. & Brunner, P. H. (2012). Metabolism of the anthroposphere: Analysis, evaluation, design: MIT Press; Fischer-Kowalski, Marina. Exploring the history of industrial metabolism. In A handbook of industrial ecology, edited by Robert U. Ayres & Leslie W. Ayres, 16–26: Cheltenham, UK and Northampton, MA: Elgar; distributed by American International Distribution Corporation, Williston, VT, 2002; Golubiewski, Nancy. (2012). Is there a metabolism of an urban ecosystem? An ecological critique. Ambio 41(7), 751–64; Kennedy, C., S. Pincetl & P. Bunje. (2011). The study of urban metabolism and its applications to urban planning and design. Environmental Pollution 159(8), 1965–73; Lifset, Reid. (2004). Probing metabolism. Journal of Industrial Ecology 8(3), 1–3; Malhi, Yadvinder. The metabolism of a humandominated planet. Is the Planet Full? (2014), 142; Taps, Stig Brink, Thomas Ditlev Brunø & Kjeld Nielsen. From ecodesign to industrial metabolism: Redefinition of sustainable innovation and competitive sustainability. In Advances in production management systems. Sustainable production and service supply chains, 111–18: Springer, 2013; van den Bergh, Jeroen C. J. M. (2013). Robert Ayres, ecological economics and industrial ecology. In Environmental Innovation and Societal Transitions 9, 1–7; Villalba, Gara, Yi Liu, Hans Schroder & Robert U. Ayres. (2008). Global phosphorus flows in the industrial economy from a production perspective. Journal of Industrial Ecology 12(4), 557–69. 83 GoLeanSixSigma, ‘The 8 Wastes’, http://www.goleansixsigma.com/8wastes. See also Conger, Sue. Six Sigma and business process management. In Handbook on Business Process Management 1, 127–48: Springer, 2010. 84 Aldrich, H., Hodgson, G., Hull, D., Knudsen, T., Mokyr, J. & Vanberg, V. (2008). In defence of generalized Darwinism. Journal of Evolutionary

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Economics, 18(5), 577–96. doi: 10.1007/ s00191-008-0110-z. 85 Galor, O. & Michalopoulos, S. (2006). The evolution of entrepreneurial spirit and the process of development. Centre for Economic Policy Research. See also Jones, Colin. Contemplating an evolutionary approach to entrepreneurship. World Futures: The Journal of General Evolution 62(8) (2006), 576–94; Nicholson, N. How hardwired is human behavior? Harvard Business Review 76(4) (1998), 134–47. 86 Schumpeter’s ‘Entwicklung’. (2011). Evolutionary economics, http:// en.wikipedia.org/wiki/ Evolutionary_economics. 87 Rammel, C. (2003). Sustainable development and innovations: Lessons from the Red Queen. International Journal of Sustainable Development, 6(4), 395–416. 88 Potts, J., Foster, J. & Straton, A. (2010). An entrepreneurial model of economic and environmental coevolution. Ecological Economics, 70(2), 375–83.

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89 Boons, F. & Wagner, M. (2009). Assessing the relationship between economic and ecological performance: Distinguishing system levels and the role of innovation. Ecological Economics, 68(7), 1908–14. 90 Potts, J., Foster, J. & Straton, A. (2010). An entrepreneurial model of economic and environmental coevolution. 91 Lovelock, J. E. (1965). A physical basis for life detection experiments. Nature, 207, 568–70; see also Lovelock, J. E. (1972). Gaia as seen through the atmosphere. Atmospheric Environment, 6, 579–80. 92 Williamson, P. et al. (2012). Ocean fertilization for geoengineering: A review of effectiveness, environmental impacts and emerging governance. Process Safety and Environmental Protection, 90(6), 475–88; 93 Smetacek, V., et al. (2012). Deep carbon export from a Southern Ocean iron-fertilized diatom bloom. Nature, 487(7407), 313–19. See other research by

Whitney, Frank & Robert, Marie (2002). Structure of Haida Eddies and their transport of nutrient from coastal margins into the NE Pacific Ocean. Journal of Oceanography, 58(5), 715–23; Keith Johnson, W. et al. (2005). Iron transport by mesoscale Haida eddies in the Gulf of Alaska. Deep Sea Research Part II: Topical Studies in Oceanography, 52(7–8), 933–53; and Crawford, William & Whitney, Frank. Tracking eddies that feed the sea. Earth Observatory, NASA, http:// earthobservatory.nasa.gov/Features/ Eddies/eddies.php. 94 Strutton, P. (2012). ‘Mixing iron into the north Pacific stirs geo-engineering controversy’, The Conversation, 8 November, http://theconversation.com/ mixing-iron-into-the-north-pacific-stirsgeo-engineering-controversy-10490; Strutton, P. (2012), ‘Mixing iron into the north Pacific stirs controversy’, http:// www.whoi.edu/fileserver.do?id¼137324& pt¼2&p¼66107.

» CHAPTER FOUR SOCIAL AND ETHICAL ENTREPRENEURSHIP CHAPTER OBJECTIVES

1

To examine the concepts of the social entrepreneur and the social business

2 To explore the mind-set of social entrepreneurs 3 To introduce the concept of ecopreneurship 4 To define the term ethics and the implications for entrepreneurs 5 To examine environmental crime and its temptations for entrepreneurs 6 To examine cross-cultural concepts of ethics and corruption 7 To examine the ethics of criminal entrepreneurs and their similarities to other entrepreneurs 8 To focus on the challenges that face disadvantaged entrepreneurs

Orville Wright did not have a pilot’s license: Don’t be afraid to bend, or break the rules. Richard Tait, Cranium Inc. There is a fine line between the delinquent mind of an entrepreneur and that of a crazy person. Anita Roddick We haven’t inherited the Earth from our ancestors. We have borrowed it from our children and grandchildren. Traditional saying

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This chapter has a wide remit. It first looks at social entrepreneurship. It’s then just a short hop to environmental entrepreneurship, or ecopreneurship. From there, we examine entrepreneurial ethics cross-culturally. We conclude with some remarks about the importance of disadvantaged entrepreneurs. As management topics go, these are all comparatively new concepts. What unites them? There is a Chinese proverb that says, ‘When the wind changes direction, there are those who build walls and those who build windmills’. To deal with issues of social and ethical entrepreneurship in the twentyfirst century, we must build windmills in every shape, size and colour, use them ourselves and export them to others.

SOCIAL ENTREPRENEURSHIP Many countries – particularly in Asia – have a long history of social entrepreneurship, ranging from credit unions and cooperatives to a whole host of new, innovative programs with goals ranging from fighting poverty and urban decay to funding for the arts and adapting to climate change. The field of social entrepreneurship is an exploding area for research and teaching.1 While the field may be relatively new, individuals who adopt entrepreneurial strategies to tackle social issues go way back in history. Social entrepreneurship has been around for as long as humans have lived in communities.

DEFINING THE SOCIAL ENTREPRENEUR There has been a lively debate in simply defining social entrepreneurship. One problem is that a social business can cover everything from not-for-profits, through to charities and foundations, to cooperative and mutual societies and all the way to for-profit businesses. Organisations as diverse as the Muslim Brotherhood and the Catholic Church run social businesses. It is probably best to go beyond a business definition because social entrepreneurs act as change agents in the social sector. They identify a social problem and use their entrepreneurial skills for both social and environmental goals. They innovate and act according to their desire to create and sustain social value for others. They consider themselves to be accountable to the constituencies they serve. Their assets and wealth are used to create community benefit. They use (at least in part) trading activities to achieve this. Profits and surpluses are reinvested in the business and community rather than distributed to shareholders. There is either a double or triple bottom line paradigm that balances economic, social and possibly environmental returns.2 Sources of social revenue are equally diverse. Not all social entrepreneurs have ‘cash sales’ (even from grants). London Business School Dean, Laura Tyson, defined the social entrepreneur as a person ‘driven by a social mission, with a desire to find innovative ways to solve social problems that are not being or cannot be addressed by either the market or the public sector’.3 Are social entrepreneurs different from business entrepreneurs? Ashoka Foundation’s Bill Drayton points out the social entrepreneur’s differences this way: The professional succeeds when she solves a client’s problem. The manager calls it quits when he has enabled his organisation to succeed. Social entrepreneurs go beyond the immediate problem to fundamentally change the system, spreading the solution and ultimately persuading entire societies to take new leaps.4

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Social entrepreneurs are sometimes referred to as ‘public entrepreneurs,’ ‘civic entrepreneurs’ or ‘social innovators’. Wherever they are, they play the role of change agents by: • adopting a mission to create and sustain social value (not just private value) • recognising and relentlessly pursuing new opportunities to serve that mission • engaging in a process of continuous innovation, adaptation and learning • acting boldly without being limited by resources currently in hand, and • exhibiting heightened accountability to the constituencies served and for the outcomes created.5 Drayton famously commented that ‘social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionised the fishing industry’.6 Like business entrepreneurs, social entrepreneurs are creative thinkers continuously striving for innovation, which can involve new technologies, supply sources, distribution outlets or methods of production. Innovation may also mean starting new organisations or offering new products or services. Innovative ideas can be completely new inventions or creative adaptations of existing ones.7 How many social entrepreneurs are there in the world? The Global Entrepreneurship Monitor found that the rate of social entrepreneurship activity (SEA) is lower than the rate of business entrepreneurship. It ranges up to about 4 per cent of the adult population in the UAE, Argentina, Iceland and the USA. (Figure 2.2 is on senior-preneurs and does not make a good comparison. Figure 2.1 doesn’t show country specifics so is also not a good comparison.) Latin American countries like Venezuela, Peru, Jamaica and Colombia come in second rank at about 3.5 per cent. We know from history that social entrepreneurs are highly concentrated in the Indian subcontinent, especially in India, Pakistan and Bangladesh. Reasons for this include political problems, the sheer scale of poverty-related dilemmas and an extraordinary number of natural disasters.8 There are other differences as well. In contrast to business entrepreneurs, where older age groups predominate, young people have a relatively higher chance of becoming social entrepreneurs. While social enterprises are more likely to be started by men than by women, the ‘gender gap’ is not as high as in business entrepreneurship. Education is a good predictor of becoming a social entrepreneur. Students are more likely to be engaged with social entrepreneurial activity than other groups. Interestingly, non-white ethnic groups are more likely to be active as social entrepreneurs. Low income and deprivation do not appear to be good predictors of social entrepreneurial activity.9

WHAT IS A SOCIAL BUSINESS? The three traditional sectors – public (government), private (business) and social (non-profit) – have blurred in the new millennium as social and environmental objectives increasingly blend together with business approaches. This can be seen everywhere, from civic and municipal enterprises, community development financial institutions, faith-based enterprises, blended value organisations, social economy enterprises, social venturing, sustainable businesses or social enterprises. Whatever they are called, they are dedicating more resources to delivering social and environmental benefits, while public and social sector organisations are attempting to operate in a more businesslike manner. Figure 4.1 shows where social businesses and enterprises fit within two criteria: where they receive their revenue from and how they distribute their profits. In one direction we categorise organisations by their ‘bottom line’. Do they seek to maximise the financial benefits to owners, or do they seek to maximise the social benefit to the community as a whole? In the other direction, we categorise them by their source of income. Does their income come primarily from earned sources (market exchange of value/sales) or does it originate from some contributed source such as charity, grants, taxes or subsidies?

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Using these criteria, we can distinguish between traditional for-profits, for-profits with corporate social responsibility (CSR) goals, and social businesses. At the other end of the spectrum is the traditional non-profit and its subsidiary, a social enterprise that seeks direct earned income on behalf of the non-profit. Finally, there is the true social business pursuing social and environmental aims through the use of business methods. Maximise financial benefit

FIGURE 4.1 DEFINING SOCIAL BUSINESSES AND ENTERPRISES

Maximise social benefit

Earned (sales)

Contributed (charity, tax) Source of income

Bottom Line

Traditional non-profit

Social enterprise

Traditional for-profit

For-profit with CSR

Social business

Source: Adapted from Fourth Sector, ‘The emerging fourth sector’, The Fourth Sector Network, ª 1997–2008.

Is social or environmental innovation compatible with large organisations? The answer of course is yes, it is. Even large governmental corporations can be social enterprises. We’ll get to that in Chapter 8 when we discuss the corporate equivalents of social entrepreneurs, called social intrapreneurs.

THE MIND-SET OF SOCIAL ENTREPRENEURS Continuing the discussion on mind-sets from Chapter 2, do social entrepreneurs have a different mind-set from business entrepreneurs? It is true that social entrepreneurs do the same things as business entrepreneurs and have the same skills and temperament.10 But there are differences. Social entrepreneurs are not as overtly positive and confident as mainstream entrepreneurs. They are more likely to fear failure than their business counterparts and are more likely to say that lack of finance will stop them.11 Drayton sees the biggest difference: Scholars and artists come to rest when they’ve expressed an idea. Managers, when they solve a problem for their company, complete their goal…. None of that satisfies a social entrepreneur. The entrepreneur simply knows in a very deep way that, ‘I have got to change the whole society’.12

Yes, both business and social entrepreneurs have a mission and values. But for social entrepreneurs, the social mission is central. For business entrepreneurs, return on investment and profit are central. Both wish to create superior value, but that value is very different.13 Social enterprises are fundamentally different from commercial ones. They sometimes have a spiritual or virtue dimension, something very often missing from commercial enterprises.

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One interesting study shows some interesting differences between social entrepreneurs and business entrepreneurs. Kalish argues that they have psychologically distinct orientations to spotting a market gap and filling it.14 • Business entrepreneurs find ‘structural holes’ between similar (homophilous) groups of people. For example, they spot market gaps between connected categories of people, such as between suppliers and customers. Customers, who are actively seeking those products, are often not aware of the supplier. Business entrepreneurs position themselves in the middle (‘entre’) to plug the structural hole. They do not introduce customers and suppliers to one another so that they can keep the positional power inherent in plugging the gap for their own increased personal gain. • Social entrepreneurs also want to plug structural holes. The difference is that they do this between competing (heterophilous), conflicting or even warring groups of people. They sometimes do this despite the potential personal cost involved and despite the fact that the groups may view each other as incompatible and in conflict. The psychological profile of social entrepreneurs suggests that they do not see others in terms of categories (for example, suppliers and customers), but rather as real individuals. Compared with business entrepreneurs, social entrepreneurs view themselves as ‘embedded in the larger context and may, therefore, be more similar to the non-partisan and the mediator’.15 They value the unity of the whole of society and attempt to link others to the benefit of society. Environmentally focused sustainability entrepreneurs may also have a unique mind-set.16 They seek to combine the environmental, economic and social components of sustainability in a holistic manner.17 They are said to have a different organising logic from more conventional entrepreneurs.18 Market creation is more difficult for them because the broader community (especially finance markets and governments) has sometimes not progressed far enough to understand their innovations. They also face confusion in the marketplace because they may operate their businesses in ways that run counter to popular perceptions of entrepreneurial behaviour (for example, donations to environmental causes, employee-friendly working conditions, a greater interest in wider social issues than bottom-line profits and a concern for the longer-term implications of their business activities).

HOW UNREASONABLE ARE YOU? Successful social entrepreneurs change the world by being ‘unreasonable’ – refusing to accept the status quo. Here’s how to become one of these pioneers: • • • • • • • • •

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Shrug off the constraints of hierarchy, tradition and bureaucracy. Never do something just EDGE because that’s the way it’s always been done. Focus on social value creation. In that spirit, be willing to share your innovations and insights so others can replicate them. Apply practical solutions to social problems, combining innovation, resourcefulness and opportunity. Innovate by finding a new product, service or approach to a social problem. Have an unwavering belief in everyone’s innate capacity to contribute meaningfully to economic and social development. Show a dogged determination that pushes you to take risks that others wouldn’t dare. Balance your passion for change with a zeal to measure and monitor your impact. Collaborate with change makers in other sectors. Display a healthy impatience. Understand that it’s sometimes necessary to jump into change before all your ducks are in a row. If it’s clear to you that it’s time to act, don’t hesitate. Source: Society for Non-Profit Organisations, ‘How unreasonable are you?’, Non-profit World, March/April 2012, https://www.snpo.org/ readarticle.php?id¼1888. Adapted from John Elkington & Pamela Hartigan, The power of unreasonable people: How social entrepreneurs create markets that change the world, Harvard Business Review, 5. Published by Harvard Business Publishing, ª 2008.

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ECOPRENEURS Since the Brundtland Report was published in 1987 (see Chapter 3, page 88), the concepts of sustainability and sustainable development have become mainstream. The old definition of sustainability used to mean simply surviving or maintaining a business’ viability against its competitors. Nowadays the term sustainability means a real commitment to the environment and climate change mitigation/ adaptation as well as a revamping of the entire business model to its core. Starting in 2011, the International Organization for Standardization changed its ISO 26000 Social Responsibility standard to include both meanings. It states that, ‘sustainable business for organizations means not only providing products and services that satisfy the customer, and doing so without jeopardizing the environment, but also operating in a socially responsible manner.’19 As we explored in Chapter 3, in the past, some entrepreneurs simply tried to deny the planet’s problems. At worst, they exploited and plundered scarce resources so that they could get their ‘fair share’ before their competitors did. That just made the sustainability problems worse. To counteract this kind of behaviour, governments have put in place an increasingly bewildering series of regulations to limit such environmental excesses (see Chapter 13 on how environmental regulation affects entrepreneurs). This, in turn, increases the compliance costs to entrepreneurs, which leads to a vicious downward spiral as business resistance to regulation leads to more government pressure, which in turn creates more resistance. Fortunately, in the twenty-first century a growing cohort of business and social entrepreneurs, NGOs, impact investors and philanthropists have realised that an environmentally friendly approach does not necessarily translate into a decreased bottom line. In fact, it can even lead to gains in profitability. Given the substantial changes in climate that are forecast there has been substantial interest in understanding the economic consequences of climate change. An entrepreneurial business can gain competitive leverage by: • reducing costs through cutting back on pollution outputs and decreasing raw materials they use • fostering greater customer loyalty by satisfying the demand for eco-friendly goods • creating a desirable environment in which to work, thereby making recruiting easier and being able to retain trained staff. The literature highlights the role that entrepreneurial individuals and organisations play in the transformation towards sustainability.20 There is a strong link between entrepreneurship and environmentalism. The term ecopreneurship is a combination of two words: ‘ecological’ and ‘entrepreneurship’. An entrepreneur sometimes strives for success by exploiting market opportunities regardless of the consequences. This may be seen as inconsistent with the need to conserve the planet and prevent environmental damage caused by market forces. But an ecopreneur combines the unrelenting drive and imagination of the entrepreneur with the stewardship of a conservator rather than the devastation of an exploiter. Ecopreneurship has become a concept in business research since the early 1990s. Elkington and Burke, in their book The Green Capitalists, argued that environmentalism is in entrepreneurs’ best longterm interests as resource depletion and transportation congestion reduce profits. Important to the ‘green capitalist’ argument is that: (1) business can adjust its behaviour; and (2) that consumers can make environmentally friendly purchase decisions. Steven Bennett’s Ecopreneuring focused on opportunities for innovative entrepreneurs to create growth-oriented eco-businesses such as waste recycling, reducing air pollution, ‘atmospheric businesses’, fuel for the planet, waterworks, safe foods, enviro-investment and education on environment. They, together with Berle and Blue, began to use terms like ‘environmental entrepreneur’, ‘green entrepreneur’, ‘eco-entrepreneur’ and ‘ecopreneur’. Anderson and Leal’s 1998 book Enviro-Capitalists investigated what it takes to be a successful entrepreneur in the environmental arena.21

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Many of today’s entrepreneurs may not identify as such, but they are actually ad hoc ecopreneurs seeking to find commercial opportunities in a carbon-constrained world.22 These people depend on their ability to find products and services that hedge against physical climate risk, mitigate regulatory costs or improve/repair corporate reputations through green business. These are the numerous, nonideological, savvy entrepreneurs who seek to manage climate risk in the supply chain, invest in lowcarbon activities and innovate new technology that sells while improving the planet. This is the business of climate change entrepreneurs who seek competitive advantage on a warming planet rather than being driven by climate change ideology. What are the drivers of profit for climate-change-oriented entrepreneurs? It always comes down to revenue and cost: 1 Revenue drivers • What percentage of climate-related costs will we be able to pass through to customers? • How can we generate streams of revenue from new low-carbon products? • What new forms of income (for example, carbon credits) will become available? • What threats do we face from low-carbon substitute products? • What will be the impact of weather patterns on revenue? 2 Cost drivers • How can we pass on our regulatory costs? • Is there a chance that emissions will be taxed? • How much will our raw materials costs escalate? And those of our competitors? • How much will our energy costs rise? • How will our risk profile affect our insurance premiums?23

ETHICS AND ENTREPRENEURSHIP Social entrepreneurs are not the only ones who face choices. Perhaps now is a good time to turn to the field of ethics because it concerns all entrepreneurs. What is ethics all about? Here’s a quick ethics check: • If you are invited by a business contact for dinner in China, is it a gift or a bribe to take a bottle of wine and a box of chocolates? • Is it ethical to change the name of your business to make it appear that you are involved in movie production so that you can place a van on the streets and sell shoes outside a fashion convention? • Is it ethical to put pictures of young children in underwear in your advertising? • Is it ethical to pad your expense account, conceal cash receipts from the tax office, pay your employees under the table, or copy a protected computer program? • Is it ethical to put your business’s rubbish into a personal rubbish bin before you put it out on the street for collection if personal collection is free and business collection is taxed? In the past we used to hear that ‘the business of business is business’. What that meant was that profit and shareholder value trumped employee welfare or protection of the environment. This laissez faire attitude may have built a base of prosperity for some, but at considerable social cost for many and lasting environmental costs for the planet. Entrepreneurship can cause ‘losses and hardships for some members of society … even as it creates new wellbeing among other stakeholders’.24 For many years, corporate social responsibility (CSR) was the rage. This meant that a company was supposed to align its business operations with social values. The problem was that this frequently meant aligning operations only with social activities that increased profits. Doing

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anything else would violate the contract that the company had with shareholders to maximise returns. CSR helped sensitise business to a growing range of economic, social and environmental challenges, but progress so far towards true sustainability is ‘equivalent to arriving at the first base camp for anyone climbing Mount Everest’.25 We are now in a different era where we would rather use the term corporate responsibility for a sustainable environment. There is no longer any serious scientific doubt that every major ecosystem in the world is in decline. Why? Because ‘human activity is putting such strain on the natural functions of the Earth that the planet’s ability to support future generations can no longer be taken for granted’. Former UN General Secretary Kofi Annan added: ‘The very basis for life on Earth is declining at an alarming rate’.26 As American author Thomas Friedman says, the world has a problem: It is getting hot, flat, and crowded. New middle classes have emerged throughout the world. Rapid population growth may reach a point that tips toward famine and battles for Lebensraum. The planet is becoming socially and environmentally unstable with diminishing energy, extinction of species and accelerating global warming. We have cleared a large portion of the planet’s forests, overfished and overhunted our animals and polluted our atmosphere to the point of global warming.27

It is also a matter of the market size in exchange for social justice. As Microsoft founder Bill Gates has said: Why do people benefit in inverse proportion to their needs? Market incentives makes that happen. In a system of capitalism, as people’s wealth rises, the financial incentives to serve them rises. As their wealth falls, the financial incentive to serve them falls until it reaches zero. We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well.28

These are sobering words for entrepreneurs of the twenty-first century because the primary instrument that has created the disparity between the rich and the poor and accelerated the Earth’s destruction has been business, led by entrepreneurs, as it has sought to fulfil society’s rapacious appetite for goods and services. What will entrepreneurs think of next to destroy the planet? Or as business leader Ray Anderson famously asked ‘Is there a business case for ending life on Earth?’ Or how about transferring life off Earth? If we insist on ruining our planet, we have to stop claiming we are a superior species. A sustainable business must produce a net gain, but an eco-sustainable business can turn that into a competitive business advantage. All the basic technologies, methods, products and processes already exist to solve global warming, feed the world, provide health for all, conserve scarce resources, rebuild rainforests and secure the future of the planet. The problem is not lack of technology, nor lack of political will, nor careless consumers. The central issue is price.29 For business, it is an opportunity to use or lose. Fortunately for us entrepreneurs, this dilemma is imaginary. The Global Commission on the Economy and Climate (2014) makes a convincing case that ‘we can achieve both better growth and a better climate’. It’s a win-win situation. Reforms needed to revitalise growth and improve well-being can also be critical to tackling climate risk. The reason is that the plunging cost of renewable energy makes it possible to lay the foundations of an economy with lower greenhouse gas emissions at a profit. Potentially, up to 90 per cent of the actions needed to get onto a 2C pathway (limiting temperature increase to 2C over preindustrial levels) could be compatible with goals of boosting national development, equitable growth and broadly shared improvements in living standards.30 For entrepreneurs, research evidence increasingly shows that profit and sustainability can go hand in hand. Global companies like Google, Honda, Tesco, Hewlett-Packard, and Australian businesses

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like Veolia (aqua-culture using waste-driven energy), Southern Cross Resorts (triple bottom line embedded in guest experience), SITA (de-packaging technology to sort out more recyclable waste),31 are saving millions, if not billions, of dollars by reducing their carbon footprints. The greater the cost savings, the faster it will happen.32 Sustainability is not just a new form of making profit – it is a new form of ethical wealth creation, which brings us now to entrepreneurial ethics.

DEFINING ENTREPRENEURIAL ETHICS Ethics has figured prominently in philosophical thought at least since Socrates, Plato and Aristotle. Derived from the Greek word ethos, meaning custom or mode of conduct, ethics has challenged philosophers for centuries to determine what exactly represents right or wrong conduct. About 560 BCE, the Greek thinker Chilon offered the opinion that a merchant does better to take an honest loss than to make a dishonest profit. His reasoning was that a loss may be painful for a while, but dishonesty hurts forever – and that still is timely advice.33 Many entrepreneurs, especially social entrepreneurs, are highly ethical people, but some entrepreneurs are not. Why is that? Is it because they have a strong ‘action bias’ that prevents them from considering ethical issues? Is it because they are more focused on personal financial gain even at the expense of others? Are teenagers who love rule-breaking and who are non-conformists more likely to become entrepreneurs? Why is it that male teenagers who engage in ‘modest rule breaking’ in adolescence (e.g. delinquency and family/school offences) are more likely to become entrepreneurs than corporate managers? Can the lack of resources (or their short-term availability) make an entrepreneur rely on corruption and bribery? Should an entrepreneur introduce a morally questionable technology in an ‘ethically pioneering’ situation that could actually lead to ‘destructive innovation’? Just think killer robots deployed for military use that ‘escape’ into the civilian population! Even social entrepreneurs must come under scrutiny because at their core they too look for the most effective methods of achieving their missions, which increasingly involve both social and economic objectives.34 Throughout the Asia–Pacific region, social and business entrepreneurs confront corruption and business crime on a regular basis. And they engage in it too, because taking value from others without contributing anything back (so-called rent-seeking behaviour) can encourage corruption.35 Ethics in the business world is certainly not a new topic, and attitudes toward it differ around the world. Let’s look at a fascinating experiment that shows those various attitudes. Fisman and Miguel chose an intriguing ‘proxy measure’ for corruption: diplomatic immunity for parking tickets in New York City (prior to 2002, when this loophole was eliminated). These researchers looked at diplomats from different countries, all living and working in New York, and all of whom had immunity to illegally park their cars. They observed a strong correlation between parking behaviour and corruption levels back home. Diplomats from highly corrupt countries took significantly more advantage than those from low corruption countries. Corruption is deeply engrained, and even when living thousands of kilometres away from home, diplomats behaved in a manner reminiscent of officials in the home country.36 Notorious scandals of the 1980s and 1990s, when some famous entrepreneurs were involved in wanton plunder and greed, contributed greatly to the present century’s economic and climatic crises. This was reinforced during the global financial crisis (GFC) of 2007–09 by such rapacious entrepreneurs as Allen Stanford (massive Ponzi scheme) and Bernie Madoff (largest financial fraud in US history). This ‘avarice at any cost’ is well expressed by Gordon Gekko (played by Michael Douglas) in the 1987 film Wall Street (ª 1987, 20th Century Fox).

Want to practice your ethics? Divide into groups and use these exercises on CourseMate Express.

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The point is, ladies and gentleman, that greed – for lack of a better word – is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind. And greed – you mark my words – will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

On CourseMate Express read about how a Thai toy entrepreneur must decide. Is it illegal or unethical? What harm does it do to children?

FIGURE 4.2 CLASSIFYING DECISIONS USING A CONCEPTUAL FRAMEWORK

Just like racehorses, the problem is that entrepreneurs sometimes have blinders that restrict their vision. They see what works as what is right. As a result, they do not always adhere to conventional morality. Ethics provide the rules for how society conducts any activity in an ‘acceptable’ manner. Ethics prescribe a behavioural code about what is good and right or what is bad and wrong at any given time. Morals are values held by an individual (or a moral community) and define what constitutes a good life. The planet is operating in an ever more dynamic and changing environment so a moral consensus does not exist.37 Entrepreneurs are confronted by shareholders, customers, managers, the community, government, employees, private interest groups, unions, peers and so on. Values, mores and societal norms all constantly fluctuate. A definition of ethics in such a rapidly changing environment must be based more on a process than on a static code. Figure 4.2 illustrates a conceptual framework for viewing this process. As one ethicist states, ‘Deciding what is good or right or bad and wrong in such a dynamic environment is necessarily ‘‘situational’’. Therefore, instead of relying on a set of fixed ethical principles, we must now develop an ethical process’.38 The quadrants depicted in Figure 4.2 demonstrate the age-old dilemma between law and ethics. Moving from the ideal ethical and legal position (quadrant I) to an unethical and illegal position (quadrant IV), one can see the continuum of activities within an ethical process. Yet legality provides Ethical Quadrant II: Ethical but illegal / Writing a post-dated cheque when the supplier agrees to wait to cash it until your next month’s revenue.

Codification

Quadrant I: Ethical and legal / Most entrepreneurial behaviour, for example, innovating a product that no other competitor has thought of.

Manifestation

Illegal

Corporate decisions

Legal

Quadrant III: Unethical and legal / Initiate a hostile takeover of a small business that someone had worked so hard to build.

Quadrant IV: Unethical and illegal / Embezzling money from the business, falsifying business records, stealing supplies. Unethical

Source: Adapted from Henderson, V. E. (1982). The ethical side of enterprise. Sloan Management Review, 23(3), 37–48 ª 1982 from MIT Sloan Management Review/Massachusetts Institute of Technology.

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societal standards but not definitive answers to ethical questions. At the end of this chapter you will find Experiencing Entrepreneurship exercises to test and debate the application of ethics in entrepreneurial ventures. Criminals aside, we are also concerned in real-life business entrepreneurs who sometimes face ethical dilemmas. Just how far down the road towards illegality would you be willing to go to establish a new venture? Survival of the business is the strongest motivation for entrepreneurs. Laws provide the boundaries of legality, but they do not supply answers for ethical dilemmas. There are times when ethical conduct must indeed break the law. Just think of Sea Shepherd’s harassment of Japanese whaling ships in the Southern Ocean.39 Laws may overlap with, but often do not duplicate, society’s moral standards. Consider the following examples. • A Harvard MBA student advertises a new dating app that leverages Facebook friends. Problem was that his sign-up counter was faked. The counter was incremented by a random number from 1 to 5 every 1.2 seconds.40 • What can you omit? Is it legal or ethical simply to omit telling a new employee that his stock options might possibly never be owned if the company is sold before a certain date? Or, what is the right amount of unsolicited disclosure to employees, investors and customers? • Suppose a close friend offered you access to the whole customer list of a competitor even though this entire database could be purchased legally (at considerable cost) from data suppliers?41 • Who actually owns the start-up idea? If you are employed, doesn’t your employer own it? Suppose it has been floating around but no one picked it up. If it’s not going to be pursued, who owns it?42 • Is it fair to your family? Launching a new business can have considerable costs to your family. Is it ethical to give up steady income to do a start-up? Is it fair to burden your family by using savings, taking out loans or leveraging your credit cards to fund your start-up idea? • How do you divide up the ownership shares? Suppose an ‘in-group’ came up with the idea but now the larger group wants equal shares. Should the person actually willing to leave their job have a larger share? Does the team member with the greatest domain expertise get the bigger share? How can everyone get the same share as the founder? • Is it ethical to oversell the idea to investors? Is the business plan a PR piece? Can you fill in the blank bits with educated guesses? Should you leave out episodes in your own career? • For corporate entrepreneurs, what can you walk out with? What about the client list that you personally built? Can you take the list of suppliers? Even if you take no documents with you, can you use your memory of these details? Can you download all your emails when you leave? These vignettes demonstrate the conflicting needs that the free enterprise system puts on people. On the one hand are profits, jobs and efficiency; on the other hand, environmental protection, personal and social respect, honesty and integrity.

ETHICS IN THE CROSS-CULTURAL BUSINESS WORLD One of the most vexing issues is the conflicting perspectives on how to conduct business across cultures. The two extreme positions are relativist ethics or absolutist ethics. The relativist says ‘when in Rome, do as the Romans do’. The absolutist argues that the home country’s values must be applied everywhere as they are at home.

Have you ever filed an ethics complaint against a company? Go to CourseMate Express to find out how.

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A well-worn World Bank bribery formula calculates corruption as:

Corruption ¼ Monopoly þ Discretion – Accountability Corruption exists when a person (or organisation) has monopoly power over a good or service, has the discretion to decide who will receive it and how much that person will get, and is not accountable.43 The fine line between a gift and a bribe could be determined by using a ‘test of disclosure with comfort’. If the business manager or the public official can unhesitatingly acknowledge and justify the giving and receiving of a gift and its size and nature in a public forum without any adverse impact on the company’s work and reputation then and only then is it a gift within the culture of the host country. Of course, it is difficult to ask the question, ‘How much did you receive or pay last year in bribes?’ But the Global Corruption Report annually evaluates the perception of corruption around the world using a proxy. The Corruption Perceptions Index relates to perceptions of the degree of corruption as seen by businesspeople, academics and risk analysts and ranges between 100 (highly clean) and 0 (highly corrupt). The scores for Asia–Pacific countries are shown in Table 4.1. Clearly, the globally oriented entrepreneur is going to face a myriad of business environments in the Asia–Pacific, ranging from relatively clean New Zealand and Singapore through to appalling business corruption in such countries as the Philippines and Pakistan, not to mention Myanmar and North Korea. Even doing business in South Korea (rank 46) can mean running the gauntlet of petty officers and bribes while huge markets such as China (rank 80) can require a whole new orientation to dealing with corruption.44 TABLE 4.1

ASIA–PACIFIC CORRUPTION PERCEPTIONS INDEX 2014

WORLD RANK OF 177 COUNTRIES

COUNTRY

2

New Zealand

7

2014 CORRUPTION PERCEPTIONS INDEX

WORLD RANK OF 177 COUNTRIES

COUNTRY

2014 CORRUPTION PERCEPTIONS INDEX

91

85

Thailand

38

Singapore

84

100

China

36

11

Australia

80

107

Indonesia

34

15

Japan

76

119

Vietnam

31

17

Hong Kong

74

126

Nepal

29

30

Bhutan

65

126

Pakistan

29

35

Taiwan

61

133

Timor-Leste

28

43

South Korea

55

145

Bangladesh

25

50

Malaysia

52

145

Laos

25

50

Samoa

52

145

Papua New Guinea

25

80

Mongolia

39

156

Cambodia

21

85

India

38

156

Myanmar

21

85

Philippines

38

172

Afghanistan

12

85

Sri Lanka

38

174

North Korea

8

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An example is bribery, which we can define as an offer or receipt of any gift, loan, fee, reward or other advantage to or from any person as an inducement to do something which is dishonest, illegal or a breach of trust, in the conduct of the enterprise’s business.45 There is growing awareness of the risks posed by bribery, particularly in the light of recent scandals, and the public is expecting greater accountability from the business sector. Yet you may have to build a line item in your Business Plan for ‘compliance commissions’. China is now a centre for criminal entrepreneurship. This includes bribery, embezzlement, identity theft, pirating of intellectual property, bid rigging, price fixing, violation of consumer rights, diversion of foreign exchange, computer crimes and smuggling. The absence of an effective investigating authority, independent courts and a free media have also made it easier for these crimes to go undetected and unpunished both inside and outside the government. There is a trend in collective corruption whereby private companies, entrepreneurs and organised crime groups now play an important role in initiating and coordinating networks of criminal activity.46

On CourseMate Express read about how one Chinese tech firm lied to its investors, got away with it and achieved success.

SMALL BUSINESS IN CHINA IS ABOUT KNOWING HOW TO BRIBE It’s not easy to be a small-business owner in Beijing. Bribes, gifts and payoffs are part of ENTREPRENEURSHIP monthly expenses and eat away at the bottom line. If you are not being shaken down by mobsters, then you are being shaken down – or worse yet shut down – by various departments of the government. If you plan on opening and operating any kind of successful business then IN PRACTICE you had better have guanxi. Guanxi is the Chinese word for connections or having friends in high places. Nothing in China of any significance is done without it. If you want a raise and promotion in a state-owned enterprise, you need it. If you want to build a new upscale housing development that will displace hundreds if not thousands of poor local residents, you need a lot of it. Even if you want to open a small shop amongst a group of other small shops, you have to have some guanxi or you won’t be around long. Shakedowns and payoffs are just another business expense for many small business owners in Beijing. A few months back, a couple of friends and I were enjoying some Western pub fare when a group of fire officials and police walked into the bar. They made a show of inspecting the pipes, sprinklers and air vents. They then had a stern talk with the owner and left. I asked him what that was all about and he just laughed and said it was another shakedown. No big deal. A good friend of mine runs a bar in the Sanlitun area of Beijing. Sanlitun is one of the nicest areas of Beijing. Its treelined streets are home to European-style cafes, North-American-style sports bars, embassies and official residences, as well as upscale shops and boutiques. Rents are high, but so are returns for successful businesses. My friend says his bar employs a fulltime ‘guanxi guy’ to deal with payoffs and shakedowns. This guanxi guy has several restaurants and bars as clients, and he uses his guanxi to work out reasonable payments to various government officials and to make any mobsters back off if they come looking for protection money. They pay him the equivalent of about $500 a month for his services. Payoffs come in all shapes and sizes, my friend says, and it’s important to pay the right people or the situation can be made worse. If the police come by, usually a bottle or two of booze or a few free meals does the trick, but you must make sure you give it to the top guy or else lower-ranking officials will keep coming back looking for handouts. If the fire department comes by and says your bar is not up to code, and it will cost you about 3000 renminbi ($620 AUD), you call your guanxi guy and he will work out a deal for probably only half that amount. My friend says payoffs can run from as low as a few packs of cigarettes for the neighbourhood watch person to an envelope full of cash for the city planning department. Bribes are not asked for overtly. Almost always it’s a matter of ‘not being up to code’. For instance, a city official and a fire department representative will come in and tell you that odours from your restaurant are bothering local residents and you need to upgrade your ventilation system. cont.

»

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If you don’t understand the dance, then you might actually upgrade your ventilation system only to have the same two guys come back in to tell you that residents are still complaining and you need to upgrade again. At this point, unless you are Homer Simpson, you know they don’t really want you to upgrade your vents: they want you to pay them off. You then take their names and numbers and have your guy call around and work out an appropriate fee paid to the appropriate people. However, my friend figures the cost of doing business in China is no higher because of the payoffs than it is in Canada or the US. The only difference is that instead of paying business fees and taxes to the various levels of government in the West, the money he pays out in Beijing goes into people’s pockets. He says he actually doesn’t mind paying the money. What bothers him is the frustration factor of figuring out who to pay. Chinese restaurant and bar owners have it worse, because they can’t plead ignorance to various city and government officials. Adding to the problem for Chinese entrepreneurs is organised crime. Most of the criminals leave foreign-owned businesses alone, because foreigners tend to call the police or start throwing punches when faced with violent confrontation. Chinese owners tend to be more pliable, as they have homes and families to worry about. One Chinese bar owner told me he was asked to pay protection money to a group of gangsters, but instead of calling the police directly he called his guanxi guy and he then called the police. A deal was worked out and police waited for the gangster to come back and they violently arrested him when he came looking for his payoff. The bar owner explained to me that his guanxi guy had more guangxi than the mobsters did, so it all worked out in his favour. Spring and summer are the busiest months for bars and restaurants in Beijing. They are also the busiest months for paying out bribes. Some might think the corruption starts at the top of the Communist government and works its way down the authority ladder, but the central government would like nothing better than to stop this sort of illegal activity. Corruption is bad for business and bad for the country’s international reputation. The problem is the system. The courts, the educational system, the media, the police, the various levels of government and especially the economy all run on guanxi. There is definitely money to be made in China, and the cost of doing business is most likely cheaper than in Canada, but the trick is to learn to work the system and build your guanxi. Source: Trevor Metz (2008). ‘Small business in China is about knowing how to bribe’, 14 March, Canadian Broadcasting Corporation, Copyright ª 2008 by Canadian Broadcasting Corporation.

ENTREPRENEURSHIP AND ORGANISED CRIME Go to CourseMate Express to read all about it! The rise and fall of criminal entrepreneurs in Australia.

While discussing the dark side of entrepreneurship we might make mention of actual criminal entrepreneurs: the criminals themselves. Imagine having to run a criminal start-up and growth enterprise in an enduringly hostile landscape! Morselli called gangs ‘human resource management in the Cosa Nostra’. Bolton and Thompson have a fascinating chapter on entrepreneurial criminals such as Al Capone. A study of drug entrepreneurs shows they are shaped by shifting opportunity structures. The diversity ranges from boot-legging cigarettes, through hydroponic cannabis growers, to pimping, people smuggling, illegal dumping, people and species smuggling and prostitution.47 These criminals share certain challenges with entrepreneurs. They have to be excellent risk managers and information managers. For them ‘know-who’ is as important as know-how. They are future-oriented organisation builders. Like business entrepreneurs, they are continually working the edge or the margin. They have to weigh up factors like legal, social and economic risk to determine potential profit and loss. They seek ‘niche advantage’ and may change the types of crime they perpetrate. They satisfy consumer demand that legitimate markets ignore. The low levels of risk detection and the high profits available are conducive to criminal enterprise. Whether they are engaged in petty crime entrepreneurship48 like illegal cigarette importers or drug dealers, or large-scale embezzlement like Ferdinand Marcos (former Philippines president) or Mohamed Suharto (former Indonesian president), Ponzi schemes like Malaysia gold trader Genneva Malaysia Sdn Bhd, Bitcoin

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or currency trading, or motorcycle gangs and crime families, criminal entrepreneurs all share one characteristic – they steal from innocent people. This can often mean from other entrepreneurs.49 Organised crime extends easily to environmental crime. A significant proportion of both wildlife and pollution crime is carried out by organised criminal networks, drawn by the low risk and high profit nature of these types of crime. The same routes used to smuggle wildlife across countries and continents are often used to smuggle weapons, drugs and people. Indeed, environmental crime often occurs hand in hand with other offences such as passport fraud, corruption, money laundering and murder. • A seizure of illegal chlorofluorocarbons (CFCs) in Gambia also uncovered 2 tonnes of cocaine smuggled from South America. • Illegal logging and gun smuggling go hand-in-hand in Liberia. • So-called narco-traffickers in Peru are reported to be turning to timber trafficking to hide cocaine, launder money and generate quick profits. • Protected birds have been smuggled from Australia to Thailand in exchange for heroin. • Chinese crime groups are reported to be smuggling the raw ingredients for methamphetamine production to South Africa in exchange for illegally harvested abalone, which can fetch as much as US$200 a pound in Asian retail markets.50

ENVIRONMENTAL CRIMINAL ENTREPRENEURS Certainly the most morally questionable acts by entrepreneurs are environmental crime enterprises. These entrepreneurial syndicates carry out illegal fishing, illegal trade in wildlife and timber, smuggling of ozone-depleting substances, illegal disposal of asbestos, shipment of animal parts for health remedies, illegal trade in charcoal or trade in hazardous waste – all to benefit the criminal entrepreneur and their syndicate. Environmental crime is reputed to be one of the fastestgrowing areas of criminal activity globally, worth billions of dollars in profit to criminal groups around the world. Estimates range up to US$213 billion each year. To give an idea of the scale of the illegal market, the figure of US$213 billion is about 60 per cent more than the total global Official Development Assistance (overseas aid) of around US$135 billion each year.51 Environmental crime is perpetuated by everyone from the largest corporations down to naive start-up enterprises. As governments ramp up their regulatory regimes, businesses find new ways to violate laws put in place to protect the environment. The consequences of activities such as illegal logging and timber smuggling, wildlife smuggling, the black market in ozone-depleting substances, and dumping of hazardous wastes and chemicals fit the profile applied to other forms of transnational crime.52 These businesses are polluting the air, water and land. They are pushing commercially valuable wildlife species closer to extinction and they are significantly impacting the biological integrity of the planet. Correctly disposing of waste requires time and money. Some companies try to beat the system by illegally disposing of theirs. Pollution crime not only damages the environment, but also results in significant profits for criminals. The illegal disposal of waste into waterways, the air and the ground can significantly damage a community’s livelihood, destroy jobs and lower property values. The illegal actions of one company can have far-reaching consequences. Figure 4.3 shows some of the major offenders in environmental crime.

You decide. Is it environmental crime for entrepreneurs to plant palm oil in Malaysia and Indonesia? Read about it on CourseMate Express.

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FIGURE 4.3 MAJOR OFFENDERS IN ENVIRONMENTAL CRIME

POWER/WEALTH THE KINGPINS ‘White collar’ crime

THE ESSENTIAL ALLIES FIRMS – Wood, Mining, Fishing legally trading … and not quite

Politicians and lawmakers Governments

deciding on weak law enforcement

Corrupt officials Lawyers Tax advisers

Police forces

Cartely

Customs Port authorities Corrupt employees

Mining/Logging Permit administration

MAFIAS

Mafia’s top men investing in legal business as cover activities

Specialised in: WILDLIFE SMUGGLING ILLEGAL WASTE TRADE ILLEGAL CHEMICAL TRADE

Sailors on a flag of convenience vessel Small thugs

Hackers

THE UGLY ONES

Poachers Illegal loggers

Illegal fishers

Specialised in: ILLEGAL LOGGING/ MINERALS SMUGGLING Both need an efficient blend of illegal activities (great volumes to hide)

Journalists love them

THE FOOT SOLDIERS

Impoverished people (often both victims and criminals)

DAMAGE DONE Source: Environmental Crimes from Zoı¨ Environment Network, pp 2. Copyright ª 2013 by Zoı¨ Environment. Used by permission.

ENTREPRENEURSHIP AND DISADVANTAGED GROUPS On CourseMate Express read about the Rat Catchers of India. How social entrepreneurs helped untouchables with the unmentionable.

Yet another way to look at ethical entrepreneurship is to focus on those entrepreneurs who come from a background of hardship or suffering. This also fits squarely within our framework of pathways to entrepreneurship. What do we mean by disadvantaged entrepreneurs? Are disadvantaged groups more likely to become entrepreneurs? Or are they just holding on as survivalist entrepreneurs? De Clercq and Honig defined ‘disadvantaged entrepreneurs’ as those individuals having difficulty integrating into the marketplace and typically located outside the mainstream of social and institutional support for entrepreneurship.53 This is different from ethnic entrepreneurs, say, in Silicon Valley or indigenous entrepreneurs in Canada, New Zealand or Australia. These groups have been widely studied wherever immigrant communities are able to improve their socioeconomic position through entrepreneurship. (See also Chapter 12, pages 432–3 on ‘ethnic networks’.) But a truly disadvantaged entrepreneur, as opposed to an opportunity migrant, faces external disadvantages such as ethnic disrespect, lack of language skills, poor access to finance and urban

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poverty, and is usually at the bottom of the social ladder. This is again different from survivalist entrepreneurs who are precarious, vulnerable and insecure at the fringes of society.54 One thought-provoking hypothesis is that being disadvantaged may actually make one become more entrepreneurial. For example, Scase and Goffee suggest that ‘entrepreneurs may be more likely to emerge from those groups in society which are deprived or marginal; that is, groups which are discriminated against, persecuted, looked down upon or exceptionally exploited’. Some research has even looked at entrepreneurs in the context of being marginalised. Shapero addressed the issue of the entrepreneur as a displaced person. This corresponds with what is called the social marginality theory put forward by Stanworth and Curran, who suggest that the incongruity between an individual’s perceived ‘prodigious’ personal attributes and the ‘low’ position that person holds in society might propel them to be entrepreneurial. Such people seek to overcome disappointing comparisons with their own past or with social reference groups. Hagen suggests that where the behaviour of a group is not accepted or where a group is discriminated against, then a psychological disequilibrium might drive this person into enterprising behaviour to compensate for this imbalance.55 Of course, these theories do not account for all entrepreneurs, but it is an interesting hypothesis to think that disadvantaged persons would be more likely to start a new venture than other people. In the developed world this usually refers to groups such as women, youth, indigenous people and immigrants; for example, African-Americans in New Orleans, female Indian immigrants in London or overseas Chinese living in Singapore. But it could also mean gay entrepreneurs in Sydney or San Francisco, Palestinian entrepreneurs in the Gulf or even enterprising religious minorities such as Sikhs in Australia. Let’s have a look at Indigenous entrepreneurs, who play such an important role in New Zealand and Australia.

On CourseMate Express read about how ‘gypsy entrepreneur’ battles for acceptance in his recycling empire.

INDIGENOUS ENTREPRENEURS The term ‘Indigenous people’ has no universal definition. But most definitions encompass cultural groups that have a historical continuity with a region before its colonisation and who have lived largely independent or isolated from the influence of the larger nation-state. These are people who have maintained at least in part their distinct linguistic, cultural and social/organisational characteristics. Characteristics common across many Indigenous groups include reliance upon subsistence-based production and a predominantly non-urbanised society.56 Indigenous societies are found in every inhabited climate zone and continent.57 Wherever they are, they suffer from chronic poverty, lower education levels and poor health. The first wave of direct economic assistance produced only mixed results since these programs often only tried to heal the symptoms and disregarded the cause of Indigenous social and economic dysfunction. What some now refer to as the ‘second wave’ of assistance is an activist process where the efforts of Indigenous people themselves are concentrated to improve their social and economic position through entrepreneurial enterprise – through creating Indigenous entrepreneurs.58 In all nations with significant Indigenous minorities, the economic and social deprivation of Indigenous peoples has long been of deep policy concern. Colonisation and post-colonial practices deprived Indigenous people of their land, their culture and their human rights. The loss of selfdetermination denied Indigenous peoples the right over their own responsibility to manage their own affairs. Around the globe this has proved to have been socially and economically destructive. Stimulating a new sense of self-determination through Indigenous entrepreneurship has been a positive step for some groups, but it is not the answer for all Indigenous people.

Go to CourseMate Express to read about how The Body Shop uses economics to change the world and help indigenous culture.

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INDIGENOUS ENTREPRENEURS IN AUSTRALIA59 At the last census in 2011, there were 669 900 Indigenous Australians comprising 3 per cent of Australia’s populations.60 Contrary to popular belief, these Aboriginal and Torres Strait Islander populations predominantly live in Australia’s most populous areas. Just over 20 per cent live in remote and very remote areas. The median age of Aboriginal and/or Torres Strait Islander peoples as of June 2011 was 22 years, compared to 38 years for the non-Indigenous population. Despite living in one of the world’s wealthiest nations, a large proportion of Aboriginal and Torres Strait Islander Australians continue to experience endemic poverty and subsequently suffer from poor health rates, low literacy and numeracy levels, low workforce participation rates, poor employment prospects and unacceptably poor standards of living. Archaeological evidence suggests that Aboriginal people have lived in Australia for at least 50 000 years and, prior to invasion and colonial contact, they engaged in wide-ranging intellectual, trade and entrepreneurial pursuits. Trade routes traversed the Australian coast prior to European settlement in 1788.61 Goods such as pearl, shell, flints and axe heads, oyster and turtle, knives, fishing lines, blankets, rice, steel and tobacco were traded and sold over vast distances, including trade with Macassan traders from what is now known as Indonesia.62 Archaeologists have unearthed the remains of an Aboriginal stone structure at Wurdi Youang in Victoria that may have been used for observing the changing position of the setting sun and thought to be older than Britain’s Stonehenge. Another example of Aboriginal entrepreneurship is that of the Gunditjmara people of what is now Lake Condah in south-western Victoria, who conducted an enterprise that involved an 8000-year-old aquaculture industry.63 Their main product was smoked eel. This was not a subsistence or hunter-and-gatherer existence as the Gunditjmara lived in stone homes in permanent to semi-permanent settlements. They constructed extensive dams and water channels to enable them to manage water flows from the local river and rainfall, optimising eel and fish production in a series of man-made lakes. Upon harvesting, they added value to their product by smoking it, extending its durability (or shelf life) and enabling the product to be traded or sold over a vast area.64 Today, Aboriginal and Torres Strait Islander peoples are in the main an urban people who suffer high welfare dependency, few marketable skills, low work experience and a very low economic base.65 In 2014 the Overcoming Indigenous Disadvantage report by the Australian government concluded that Aboriginal and Torres Strait Islander peoples are ‘over-represented among Australians facing disadvantage, and this disadvantage appears more persistent over time and across generations’.66 Indigenous people are often caught in a spiral of discrimination that is scarcely conducive to authentic entrepreneurial activity. They experience discrimination and prejudice in the workplace. They have low levels of employment (47.5 per cent).67 They often lack marketable skills and have an almost nonexistent capital base. Many suffer cultural deprivation and a social hopelessness fuelled by an indifferent welfare system. Building an enterprising spirit in these circumstances is far from easy. There has been wide discussion, but only a few carefully focused research studies on Indigenous entrepreneurship in Australia.68 Levels of entrepreneurial activity among Indigenous people are well below those among the general Australian population.

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INDIGENOUS ENTREPRENEURS Dreamtime, boomtime ENTREPRENEURIAL Some Aboriginal entrepreneurs have joined the mining boom, building companies, creating jobs and making millions. EDGE Neville Stewart recalls the moment his company’s fortunes turned during yet another confrontation with a senior mining executive. Did he want to be an indigenous activist or a contractor, the exasperated executive asked? ‘For Christ sake,’ I was saying, ‘we are a capable company, give us an opportunity to show what we can do. I was not being an activist. I wanted one of them to open a door to my company, and eventually they did.’ Stewart began his working life at the wheel of a borrowed grader levelling red dirt roads in the heat-soaked Pilbara – Australia’s quarry to the world. Today he co-heads Australian Indigenous Enterprises, which is valued at $140 million. And that is just the beginning. They want to build AIE into a powerhouse of indigenous enterprise. They have plans for a regional airline, solar power networks, and a mobile health service for remote communities, as well as being the nation’s biggest employer of indigenous labour. For Stewart, 55, it has been a tough slog from cadging his first grader to fulfil a tender he did not expect to get, to grader owner, to a ‘top tier’ contractor to the big miners. Not so long ago, Stewart suffered the ignominy of having to sit through a speech by a cabinet minister on the value of hard work. While he brushes off the incident (there was apparently barely suppressed laughter from indigenous attendees far wiser, wealthier and hard-working than the minister), Stewart is derisive of government schemes to provide pathways for Aboriginal advancement. ‘Aboriginal people are the most trained people in Australia, but there is never a job at the end of it, just more training. You walk into any government office anywhere and you hardly ever see a black face. Source: Russell Skelton, ‘Dreamtime, boomtime’, Sydney Morning Herald, 6 March 2013, Copyright ª 2013 by Fairfax Media. Used by permission. http://www.smh.com.au/national/dreamtime-boomtime-20130305-2fiup.html.

Commercialising the Haka  ori performing arts) into a profitable business has Turning to New Zealand, desire to turn a passion for kapa haka (Ma seen Rotorua-based entrepreneur Wetini Mitai-Ngatai push through setbacks to forge a successful tourism venture, the  ori Village. Mitai Ma Founded in 2003, the village had humble beginnings – its first visitors consisted of just two German tourists. The village has captured a lucrative part of Rotorua’s thriving cultural tourism sector in its 10 years of operation, offering an authentic experience complete with hangi, cultural performances and a bush walk, and has hosted nearly 600 000 people.  ori Television reality show Mitai-Ngatai is also an award-winning kapa haka performer and is currently starring in a Ma which follows the build-up to the national kapa haka championships. ‘I had always wanted to work for myself. When I was 23 I had two fish and chip shops. Later, I moved into starting my own kapa haka roopu, Te Matarae i Orehu (which performed at Te Matatini in February). I thought, I love kapa haka and I’m going to do this as a business. Why not do something for myself and my family? My business was a way to provide  ori cultural tourism experience that now employment for my family and the wider community, through a unique Ma employs more than 100 people as well as 13 full-time staff. Source: ‘Passion for kapa haka sparks idea’, Dominion Post, 30 March 2013, Copyright ª 2013 by Fairfax New Zealand Limited. Used by permission. http://www.stuff.co.nz/business/small-business/8484876/Passion-for-kapa-haka-sparks-idea.

 MAORI ENTREPRENEURS69 By contrast to Australian Aboriginal and Torres Strait Islander peoples, the Indigenous people of New Zealand, the Maori, have rates of entrepreneurial activity that are high in global terms. Polynesian settlers arrived in Aotearoa (in te reo, or Maori language, ‘Land of the Long White Cloud’) around the tenth century. Aotearoa was visited briefly by Dutch navigator Abel Tasman in 1642. However, it was not until 1769 that British naval captain James Cook and his crew became the first Europeans to

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explore New Zealand’s coastline thoroughly. The word Maori meant ‘usual’ or ‘ordinary’ as opposed to the ‘different’ European settlers. Before the arrival of Europeans, Maori, or Indigenous Polynesian inhabitants of New Zealand, had no name for themselves as a nation, only a number of tribal names. The original meaning of Pakeha, the settlers, was a person from England. With time, Pakeha became the word to describe fair-skinned people born in New Zealand. We use the word Pakeha here in the sense of a European New Zealander. Maori actually have a history of enterprise upon which to draw. The Maori Wars of the 1860s were fuelled not only by the settlers’ hunger for land but also because Maori had become such successful entrepreneurs that they controlled a large share of the country’s commerce. Maori were involved with export of produce to Australia70 and various other countries, and to some degree Maori entrepreneurial abilities were the subject of envy by Pakeha. New Zealand’s most distinguished anthropologist, Sir Raymond Firth, in his early work on Maori economics, confirms that Maori had an entrepreneurial streak. They returned cunning with respect, he said, as this may increase one’s mana (spirit or respect). Maori dignify labour and reprove idleness. As Firth noted, ‘The deep interest taken in work, the commendation of it in proverb and in song, as well as by public opinion, the close attention paid to quality, the administration of skill, the wide fame accorded to acknowledged experts and the preservation of their names in tribal memory – all this comprises a definite social attitude in favour of industry’.71 When last measured, the rate of Maori entrepreneurship was the highest in the OECD, at 17.7 per cent of the adult population.72 Nonetheless, Maori entrepreneurs face a number of disadvantages. Many do not speak their own language (te reo Maori) well, which opens up a rift with their elders. Tribal elders may exercise power on the marae (in a traditional setting), but they generally feel powerless in today’s world of technology and change. Equally, outside of traditional contexts, members of the younger generation may have little respect for their elders (kaumatua and kuia) because they perceive them to be ill-equipped to lead in the modern world. There is a tension between traditional models of leadership, in which status is derived from age and descent, and the models of leadership that apply to the business world, based on the concept of merit. Young Maori resent the wasted and lost opportunities that arise from a mismatch between leadership capability and the nature of the opportunity. Maori entrepreneurs fight battles on several fronts. They have all the usual problems in getting their business off the ground. They may have to wrestle with the wider family group (hapu) to be culturally accepted. Finally, Maori entrepreneurs have a hard time being accepted as successful in a business world dominated by European New Zealanders. Recent research has looked at how Maori entrepreneurs are affected by climate change and environmental concerns. Bargh argues that Maori entrepreneurs have a special role to play within the triple crises of climate change, peak oil and increasing global food insecurity.73 Naturally, Maori are looking at green opportunities, primarily in renewable energy production. But Bargh argues that for Maori entrepreneurs the emerging Blue Economy, where entrepreneurs mimic nature in their processes and in the creation of their products, will be a productive enterprise. In the Blue Economy, natural processes are copied to make innovations, such as: • cocklebur and gecko providing the technology for velcro adhesive. • termite burrows providing the solutions for air-conditioning • maggots providing the solution for abattoir waste cycling • pelicans providing expandable packaging for drinks and fuel containers • dragonfly assisting in concentrated solar power technology.

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Table 4.2 lists useful resources in the areas of social and ethical entrepreneurship. TABLE 4.2

INTERNET RESOURCES FOR CHAPTER 4

SOCIAL ENTREPRENEURSHIP

AIESEC

http://www.aiesec.org

Center for the Advancement of Social Entrepreneurship

http://www.fuqua.duke.edu/centers/case

Kiva

http://www.kiva.org

Social Enterprise Alliance

http://www.se-alliance.org

Social Entrepreneurship Teaching Resource Guide

http://ashokau.org/wp-content/uploads/2010/12/Curriculum-GuidePDF-Preview1.pdf

Social Innovation Conversations

http://csi.gsb.stanford.edu/podcast

Social Venture Network

http://www.svn.org

Enactus: formerly Students in Free Enterprise

http://enactus.org/

SustainAbility

http://www.sustainability.com/

TED: Ideas Worth Spreading

http://www.ted.com

The Institute for Social Entrepreneurs

http://www.socialent.org

The Schwab Foundation

http://www.schwabfound.org

BUSINESS ETHICS

Association for Practical and Professional Ethics (United States)

http://appe.indiana.edu/

Business for Social Responsibility (United States)

http://www.bsr.org

Centre for Applied Ethics (Hong Kong)

http://www.cae.hkbu.edu.hk

Bentley University Center for Business Ethics (United States)

http://www.bentley.edu/cbe

Center for Business Ethics University of St Thomas (United States)

http://www.stthom.edu/academics/centers_of_excellence/ center_for_business_ethics/index.aqf

European Business Ethics Network (United Kingdom and Europe)

http://www.eben-net.org

Famous Quotations on Business Ethics

http://www.valuequotes.net

Globethics.net

http://www.globethics.net/

Hong Kong Ethics Development Centre (Hong Kong)

http://www.icac.org.hk

Institute of Business Ethics (United Kingdom)

http://www.ibe.org.uk

International Business Ethics Institute (United States)

http://www.business-ethics.org

Society for Business Ethics (United States)

http://www.societyforbusinessethics.org

Transparency International

http://www.transparency.org

World Bank Institute

http://www.worldbank.org/wbi

Zicklin Center for Business Ethics Research (United States)

http://www.zicklincenter.org

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TABLE 4.2

INTERNET RESOURCES FOR CHAPTER 4 (Continued )

HUMAN RIGHTS AND BUSINESS

Business and Human Rights Resource Centre

http://www.business-humanrights.org

Business Leaders Initiative on Human Rights

http://business-humanrights.org

Global Reporting Initiative

http://www.globalreporting.org

The Equator Principles

http://www.equator-principles.com

The Wolfsberg Group

http://www.wolfsberg-principles.com

United Nations Environment Programme Finance Initiative

http://www.unepfi.org

United Nations Global Compact

http://www.unglobalcompact.org

Voluntary Principles on Security and Human Rights

http://www.voluntaryprinciples.org

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SUMMARY This chapter began by showing that social entrepreneurs have a great many of the same characteristics as business entrepreneurs, but their underlying motivations are different. Social entrepreneurs are interested in meeting a social mission. Social enterprise is the term used for a market-based venture addressing social aims. There are a variety of business models that social entrepreneurs can adopt. Social businesses and enterprises are differentiated from traditional businesses by source of revenue, and distribution of profit. Social entrepreneurs have a great many of the same characteristics as business entrepreneurs, but their underlying motivations are different. Social entrepreneurs are interested in meeting a social mission. Social enterprise is the term used for a market-based venture addressing social aims. There are a variety of business models that social entrepreneurs can adopt. The mind-set of social entrepreneurs is a bit different as well, particularly in relation to mission and gap filling. Sustainability entrepreneurs are again different in their focus on the environment and social justice. The global economic and climate crises make it essential to consider the role of ethics for entrepreneurs. Entrepreneurs around the world are some of the planet’s best hopes to solve the big problems. Corporate responsibility has now evolved to include protecting a sustainable environment. Fortunately, entrepreneurs can achieve both growth and a better climate. Ethics is a set of principles prescribing a behavioural code that explains right and wrong; it also may outline moral duty and obligations. Entrepreneurs face many ethical decisions, especially during the early stages of their new ventures. Some arrive at the ‘greed is good’ conclusion, while others consider the ethical consequences of their behaviours. The opportunity for entrepreneurs to exert ethical influence on their ventures creates a unique challenge of ethical leadership for all entrepreneurs. Despite the ever-present lack of clarity and direction in ethics, however, ethics will continue to be a major issue for entrepreneurs during the twenty-first century. Decisions may be legal without being ethical and vice versa. As a result, entrepreneurs can make four types of decisions: legal and ethical, legal and unethical, illegal and ethical, and illegal and unethical. When making decisions that border on the unethical, entrepreneurs commonly rationalise their choices. One of the greatest ethical threats to the planet today is environmental crime. This ranges from illegal logging and timber smuggling to wildlife smuggling, the black market in ozone-depleting substances and dumping of other forms of hazardous wastes and chemicals. Police authorities including Interpol are tracking these types of egregious crime. Entrepreneurs frequently have to confront corruption and bribery in many countries. In the Asia–Pacific region the level of corruption is very low in New Zealand, Australia, Japan and Singapore, while countries such as Indonesia suffer from high levels of corruption. One challenge that entrepreneurs face in many countries is bribery. China is particularly difficult to work in due to the level of bribery required. There is a criminal side to entrepreneurship. Criminal entrepreneurs face some of the same start-up and growth dilemmas as ethical entrepreneurs. They face risk, are always working at the margin, weigh up ‘regulatory’ factors and constantly seek niche advantage. The chapter concluded by examining the concept of disadvantaged entrepreneurs. Is it possible that disadvantaged people might actually become entrepreneurs more frequently than other people? These disadvantages range from cultural and social to geographic and physical. Disadvantaged entrepreneurs may be of many different ethnicities, genders or cultures. In all nations with significant Indigenous populations, the slow growth of entrepreneurship and self-employment has been cause for concern.

KEY TERMS AND CONCEPTS absolutist ethics bribery corporate responsibility for a sustainable environment corporate social responsibility corruption disadvantaged entrepreneurs

Entrepreneurship

Review key terms with interactive flashcards

ecopreneur ecopreneurship entrepreneurial crime entrepreneurial ethics environmental crime ethical wealth creation ethics

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ethnic entrepreneurs Indigenous entrepreneurs Indigenous people laissez faire market gap petty entrepreneurship

Ponzi schemes psychological disequilibrium rainforest relativist ethics social business social entrepreneurship

social intrapreneurs social marginality theory survivalist entrepreneurs sustainability entrepreneurs triple bottom line

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6

7 8 9 10 11 12 13 14 15

Can you identify some social entrepreneurs in your community? Name social businesses that have no donated income from charity, taxes, grants or subsidies (see Figure 4.1). Name three dimensions that distinguish the mind-set of social entrepreneurs from business entrepreneurs. Are sustainability entrepreneurs limited exclusively to environmental matters? Why not? Name three sustainable enterprises that don’t treat the environment. Does ethical wealth creation apply to making money out of climate change? Using your own words and experiences, what do you mean when you use the term ‘ethics’? A small security company has developed an anti-home invasion app. Although the product has been tested for five years, the technical director points out that the app is susceptible to wi-fi hacking. The cash-strapped entrepreneur wants to release the product and use revenue to fix the flaw. Would you say it’s ready to go? Can you relate some environmental crimes that have occurred near you? Why does doing business in certain Asian countries raise ethical considerations for the entrepreneur? If you were an Australian or a New Zealander, would you pay bribes while doing business in China? What are your opinions on the questions of greed and entrepreneurial crime? Do you have experience in dealing with an entrepreneurial criminal? What is social marginality theory? Is it possible disadvantaged people can actually become more entrepreneurial than other people? What are the barriers and restraints that disadvantaged entrepreneurs face? What are the elements of a definition of Indigenous peoples?

EXPERIENCING ENTREPRENEURSHIP Exercises in entrepreneurial ethics

Go to CourseMate Express to take this online test to see how ethical you really are as an entrepreneur.

Ask the class to form small groups of about 8 persons to work on ideas for ethical decision-making. Provide them with information about a business to use for the activity. This could be a local business, a business idea of your choice or theirs, or a business plan sample that they have been working with in the class. Ask each group to do the following: 1 Identify problems the entrepreneur might encounter in running this business in an ethical manner. 2 Develop a 10-point code of ethics for the business. 3 Discuss policies and procedures appropriate for this business that would support the code of ethics. 4 List as many ethical problems as possible that might be faced by employees during a normal work day. Discuss the possible solutions for the problems. Consider how a procedure guide might help employees to make the best decisions. 5 Members of the group should then role-play the process of handling an ethical issue with a customer, with a supplier, with a competitor, and with the son of the owner. Discuss the results of the role-playing exercise. If necessary you may want to modify your code of ethics at this time. 6 Each group should present their code of ethics to the class and discuss major outcomes of their discussion. Source: PACE, available from the Center on Education and Training for Employment, The Ohio State University, Columbus, OH. ª Center on Education and Training for Employment. Used by permission.

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EXPERIENCING ENTREPRENEURSHIP Knowing the difference Most entrepreneurial actions are ethical and legal. Sometimes, however, they are unethical and/ or illegal. Here are the four categories of ethical/legal actions and a list of examples of Experience this activity each category: (a) to (h). Match them up by placing the number of the category next to online appropriate examples from the list (two are given for each category). Answers are provided on page 145. 1 Ethical and legal 2 Unethical and legal 3 Ethical and illegal 4 Unethical and illegal a Giving a gift of $50 000 to a foreign minister to secure a business contract with his country (a customary practice in his country) and then writing off the gift as a tax-deductible item. b Knowing that 1 per cent of all tyres have production defects but shipping them anyway and giving kilometre allowances to anyone whose tyres wear out prematurely. c Manufacturing a new fuel additive that will increase fuel consumption by 10 per cent. d Offering a member of the city council $100 000 to vote to give the entrepreneur the local cable television franchise. e Publishing a newspaper story that wrongly implies but does not openly state that the Minister for Education (a political opponent of the newspaper) is deliberately withholding funds for education because of the newspaper’s effort to win nomination support for its candidate from the teachers’ union. f Obtaining inside information from another brokerage that results in the entrepreneur netting more than $2 million. g Producing a vaccine that will retard the growth of bone cancer. h Producing and selling a drug that will reduce heart attacks, but failing to complete all of the paperwork that must be filed with the government prior to selling the product.

CASE STUDIES CASE 4.1 Australian buccaneer entrepreneur eaten by cannibals This is the colourful story of Benjamin Boyd, the nineteenth-century originator of the Australian get-rich-quick scheme, though he was certainly not the first in a long list of Australian opportunists and criminal entrepreneurs. Australia’s history is strewn with unethical rugged individualists ranging from petty entrepreneurs who had simply stolen cloth in East London to start a tailor shop – before ending up in a Van Diemen’s Land prison – to landed gentlemen who loaded their boats to make a living in the New World off other people’s backs. It is a history of half-baked dreams that achieved fabulous success, and of well-planned businesses that came to nought. We now tell the story of the latter. The story combines grand visions and ethical dilemmas in the limitless vistas of colonial Australia. It merges the most unlikely storylines of land development and gold rush fever with slave trade and cannibalism, and even inter-species communication! All these plots are connected to a beautiful sheltered harbour called Twofold Bay just north of Australia’s south-east ‘corner’. What connects these most unlikely dots of killer whales and South Seas head-hunters? It’s the great Victorian-age bucca-preneer Benjamin Boyd. Source: ‘The fantastic Ben Already a wealthy stock and insurance broker at age 23 at the beginning of the 1840s, Boyd’, published by National Library of Australia, ª 1961. Scotsman Benjamin Boyd of the London Stock Exchange was a self-made man without a drop

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of aristocratic blood. With a passion for adventure and profit, his grand scheme was to risk the £200 000 he had accumulated in London to achieve even greater profits in Australia and the islands of the Pacific. Using that almost extrasensory perception that entrepreneurs have to see over the horizon, Boyd set his sights on whaling, sheep farming and passenger steamships, not to mention creating his own Pacific republic. He spent a big chunk of his wealth on a glorious schooner named The Wanderer, which gave him immediate entry into Sydney’s Royal Yacht Squadron, where he could associate with the landed classes. But he dreamed of becoming his own aristocrat. The story goes that one day in Scotland, as a globe spun under his fingers, he paused it at a bay north of Cape Howe. ‘This is Twofold Bay,’ he told his lady, ‘and there I will found my own town, Boyd Town.’ Twofold Bay was already a well-known whaling centre due to its proximity to the whales’ annual migration route to and from Antarctica. Incredibly, it is famous as the place where human beings and killer whales (orcas) collaborated in hunting the much larger baleen whales for their tasty meat and their valuable oil and bones. A pack of orcas would locate the baleens, corral them into Twofold Bay, and then, by breaching and tail-slapping the surface, alert the human whalers onshore, who would quickly pour into their boats. The orca pack then divided into three groups, one underneath to prevent the baleen from diving, one repeatedly putting their snouts into the blow-hole to weaken the beast, and the third progressively ripping away at the flesh. The orcas would help kill their larger cousins and turn over the carcasses to the whalers – as long as the orcas got the baleen tongues and lips, which they adored.74 Whale products were to the nineteenth century what petroleum is to the world today. Whale oil greased the cogs of the Industrial Revolution and illuminated factories and homes. Whale bone was that century’s plastic. Entrepreneurially ambitious men would include whaling in their portfolios in the same way that modern entrepreneurs would invest in information technology today. Needless to say, these men had no regard to bio-diversity: breeding females and calves were slaughtered freely, with no regard for their biological importance. A man of quick action and copious resources, and persuasive to his predominantly Scottish investors, Boyd dispatched a steamer to that far coast to set up a passenger service. Undeterred by the lukewarm reception by the colonial authorities to his ideas, he dispatched a second and third steamer to Australia, and floated the ‘Royal Bank of Australia’ with his own and others’ capital, who were lured into the scheme by the prospects of handsome returns. He gathered a band of gentleman entrepreneurs and set sail ‘buccaneer-style’ in 1841 on his spectacular yacht, with cannon and long guns. Upon arrival, Boyd stepped up his steamship activities, connecting Sydney with Tasmania and Port Phillip (Melbourne). But disaster came early when one of his steamers, the Seahorse, struck rocks. The insurance company claimed captain’s negligence and Boyd was saddled with the entire loss of £25 000. Unperturbed, he started buying up land for cattle and sheep, becoming the largest landholder after the Crown at the time, with two million acres of land in the Riverina and on the Monaro plateau. The capital city of Boyd’s empire was called Boyd Town and it had a hotel, a store, rendering facilities, a jetty and a large whaling watch tower. Taking advantage of the orca feast, by 1844, he had three dozen Boyd’s Whale Tower Source: ‘Ben Boyd’s Tower’ by Bluedawe, whale boats for pursuit of any leviathan that might venture near his Wikimedia Commons, 2006.

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port. The Sydney newspaper observed: ‘Perhaps there is no individual who has done so much for the colony and in so short a time’.75 On land, Boyd spent vast sums of money and employed hundreds of workers. To avoid cash flow problems, he even issued his own currency based upon wool, cattle, whale-oil, tallow, and hides. Workers spent these notes in the company stores. Many problems confronted this fearless entrepreneur. There was dishonesty among his managers, exorbitant commissions by suppliers, misrepresentations by his bookkeepers, and extortion. Even worse than that, Boyd was covering up huge losses to his English shareholders in expectation of short- to medium-term revenues. His Royal Bank of Australia had raised money by issuing (unsecured) debentures. Boyd insisted its directors should maintain utmost secrecy, thus setting the scene for a massive fraud against the debenture holders. The bank with its proper-sounding name was really just a front designed for Boyd’s own personal use.76 Boyd’s whaling and vast land holdings required a huge numbers of workers. He advertised everywhere and had no shortage of volunteers to accept free passage to Twofold Bay, but the offer of an extra pound of wages from a rival sheep rancher always induced them to break their engagement. Boyd ultimately resorted to employing convicts who had served their time, and learned to prefer them. But there were never enough workers. So this ever-innovative entrepreneur seized upon one of the most loathsome and unethical practices of the time, blackbirding. A cross between slavery and indentured servitude, blackbirding meant coercing people through trickery and kidnapping to work as labourers. By 1847, Boyd ordered his ship Velocity to travel to present-day Guadalcanal to capture workers and send them to the pastoral districts. Typically, they would lay anchor in a harbour and then beseech the local leader for 50 ablebodied men to clean the vessel. In another locale they might invite some dozens aboard to trade tobacco, knives, Source: Samuel Calvert (1828–1913) and Oswald Rose Campbell files, matches and seamen’s clothing. The men aboard, the (1820–1887) – State Library of Victoria. sailors would weigh anchor and kidnap the unsuspecting South Sea Islanders. But even this venture proved a failure, as many of the islanders perished in Australia, a very few managed to find a friendly vessel to return home. Having barely missed success due to the steamship insurance debacle and the late 1840s depression, by 1849, in just seven short years, Boyd’s operations at Twofold Bay had ground to a halt. What was worse, another of his ships was wrecked bringing back a crew of South Sea Islanders and the ship was uninsured. Shipwrecks, dishonest managers, unfit labourers – not to mention his own swindler instinct – did Boyd in before he could ever quite achieve success. Ever the irrepressible optimist, he slipped quietly away from Sydney (and from his creditors) to start a new escapade when he heard about the California Gold Rush in 1849. He set off for San Francisco with a brigade of followers on the glorious Wanderer. Stopping in New Zealand, they loaded the ship with flour and Maori kumara (potatoes), which they sold at prodigious prices in the Golden Gate. Little is known of Boyd’s activities after San Francisco, but all his labours in the California foothills came to nought. His heart was not in panning for gold (fortunately he had a crew of South Sea Island sailors who did the digging for him) but he still had his glorious schooner and a sizeable amount of funds and investments. Boyd’s buccaneer spirit came to the fore and he launched yet another grand scheme, this time seeking to create a principality in the Pacific. Stopping first in Hawaii, Boyd convinced legendary King Kamehameha to become regent of a Pacific empire ranging from Hawaii and the Marquesas to Samoa and Tonga, but his real plan was to loot them of their presumed resources. He reconnoitred various South Seas islands and finally settled on San Cristobal (now Makira) and Guadalcanal in the Solomons.

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Arriving from Hawaii, and presumably not knowing that Makira, Solomon Islands, was the very harbour whence his ship Velocity had kidnapped so many South Sea Islanders, Boyd lay at anchor for several days while he inspected ashore. On 15 October 1851, Boyd paddled off for a little pigeon-shooting before breakfast and never came back. The rest of the story is certainly embellished in the retelling. Rapid gunfire was heard and a search party was launched. When they arrived, all they saw were great numbers of footprints, evidence of a struggle and Boyd’s deserted paddle boat. Boyd was nowhere to be seen, but they did recover his belt. Was entrepreneur Benjamin Boyd stripped, killed and eaten by the families of victims of his blackbirding expedition in Guadalcanal? The evidence points to that. The irony that the man who first brought indentured labour to Australia should finally be eaten by those same islanders was not lost on his countrymen. As one historian quips, ‘Australia’s penchant for cutting down tall poppies was never more dramatically gratified . . . That he had been eaten merely added titillation to a good story’.77 Three years later in 1854, hearing rumours of a ‘wild white man’ still alive and possibly a prisoner on the island, the cutter Oberon and the HMS Herald arrived to search for Boyd. They found trees that Boyd had marked, so the searchers announced that they would give 100 tomahawks if Boyd was delivered to them alive. Two enterprising natives assured them Boyd was dead and they presented what they claimed was Benjamin Boyd’s skull for ‘twenty tomahawks’. (Examining the skull, Australian phrenologists asserted that it was not Caucasian and the bone still resides in the Australian Museum in Sydney with the inscription ‘Skull of a Polynesian [sic – it was Melanesian] sent as Captain Boyd’s’.) Another Islander told the rescuers the probable truth that Boyd was ‘killed by Chief Possakow’. Unconvinced, the rescuers left behind hatchets, spectacles and cards with the inscription ‘Seeking you. Advise us. H.M.S Herald’. Nonetheless, the captain’s log concludes Boyd was killed after being captured. The Sydney Morning Herald reported that Boyd had been eaten and his skull was hung outside the chief’s house.78 Headhunting was practised at the time in Melanesia, as was anthropophagy (eating human flesh).79 It is documented that the captain of another blackbirding vessel, the Minolta, was beheaded during a labour ‘recruiting’ drive.80 The ultimate irony was that Boyd was a man ahead of his times in the sense of just a few years ahead of his times. He was so close to success in Twofold Bay. Done in primarily by his insurance failing to pay, he almost pulled off a brilliant con on his investors. Having lost huge land value in the depression of the late 1840s and finding no gold in California, it is poignant that just after his death gold was discovered in his beloved Australia and land values throughout the colony soared. Historian Tom Mead agrees, ‘Ben Boyd was a man before his time.’ Mead also adds that Boyd would have felt in good company with the ‘corporate cowboys’ of Australia’s 1980s and 1990s.81 The last enduring irony was that Boyd’s flagship Wanderer, returning to Sydney, struck the bar on Port Jackson and was completely wrecked, ending her days after a most eventful career in both Australia and the South Seas. Adapted from the historical record. Sources in addition to the endnotes: Walsh, G. P. ‘Boyd, Benjamin (Ben) (1801–1851)’, Australian Dictionary of Biography, http://adb.anu.edu.au/biography/boyd-benjamin-ben-1815/text2075; Wellings, H.P.M (1940). Benjamin Boyd in Australia (1842-1849) Shipping Magnate; Merchant; Banker; Pastoralist and Station Owner; Member of the Legislative Council; Town Planner; Whaler. Sydney: DS Ford) http://handle.slv.vic.gov.au/10381/152332; Lawson, Will (1939). In Ben Boyd’s Day (Sydney: New Century Press); Diamond, Marion (1988). The Sea Horse and the Wanderer (Melbourne: Melbourne University Press).

QUESTIONS

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How would you describe or define the opportunity that attracted the entrepreneur Benjamin Boyd to venture to Australia? Was the idea well grounded? Consider such things as natural resources, labour, money and social pressures and discuss the points that undermined the sustainability of Boyd’s various ventures. Given the mores of the times, was Boyd an ethical entrepreneur? Referring to the discussion of traits in Chapter 2, was Boyd’s irrepressible optimism actually just bloody-minded ignorance? Should history judge Boyd as a failed entrepreneur? If so, was failure due to his own devices or was he a victim of circumstances? Compare and contrast Boyd’s entrepreneurial trajectory to that of Joseph Hatch. What lessons could be drawn from this case for pioneering entrepreneurs today? What would be the moral to this story? What are the physical places or technology fields in the twenty-first century that may parallel setting sail to a distant land in the nineteenth century? Using the story as an analogy, what hazards may face the pioneering entrepreneur?

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CASE 4.2 ori village A living culture, Tamaki Ma Often the values and needs of sustainable tourism sit uncomfortably with the requirements of commercially driven tourism enterprises. The Tamaki Maori Village in Rotorua, New Zealand, bears testament to the fact that the two can exist and succeed symbiotically. Founded by Maori brothers, Mike and Doug Tamaki, their driving vision of helping to preserve the Maori culture and add authenticity to the tourism experience has been fulfilled, as has their ancillary aim to develop and run a successful Maori tourism business. What makes this story even more remarkable is that success has not been achieved with aid from governments or outside funding, but rather it is a product of sheer hard work and inspiration of the two brothers, plus a little help from a Harley-Davidson motorcycle. Rotorua is the geothermal capital of Aotearoa New Zealand. While other industries such as agriculture, retail and forestry have also flourished in the area, it is tourism that remains at the centre of the region’s infrastructure. One-fifth of the city’s working population is employed in the tourism industry, which must carefully balance a dynamic and contemporary attitude with a steadfast commitment to a 600-year-old cultural heritage. Tourism in the region and throughout New Zealand has tended to reflect the ideologies of the period. By the twentieth century Maori were being widely used as a marketing tool by Pakeha operators. Marketing and tourism products were often characterised by ‘kitsch’ and not altogether culturally appropriate depictions of Maori culture. The culture was portrayed, rather than experienced, with cultural groups brought to hotels in order to perform. This approach saw the development and perpetuation of a tongue-poking, poi-twirling, skirt-swinging cliche´ surrounding Maori and their culture. It was against this background of Maori tourism stereotypes and limited Maori economic involvement in the industry that brothers Mike and Doug Tamaki developed Tamaki Tours and later the Tamaki Maori Village. The driving vision of the brothers was to provide visitors with an authentic, deeper and more spiritual experience of Maori culture and to run a successful Maori business. It is perhaps ironic, then, that the birth of the business that was to win New Zealand’s top Maori tourism award began with the sale of an American cultural icon – a Harley-Davidson motorcycle. In the late 1980s Mike Tamaki had been driving tour buses around the region for a major tourism company. Mike’s interactions with the tourists led him to believe that they wanted more than basic sightseeing; they longed for a fuller, more meaningful experience. They wanted to know who the Maori were, the people, the places. He had unwittingly discovered a huge gap in the market and an opportunity to create more personalised tours, which included elements of culture and storytelling. Mike approached his brother Doug, who was the proud owner of a classic Harley-Davidson. It took Mike three months of sweet-talking his brother to convince him to trade his beloved motorcycle for a minibus. The minibus, a 16-passenger affair, was hand-painted with signs, and brochures promoting the newly established ‘Tamaki Tours’ were printed. The Tamakis’ personalised tours, laden with sights, storytelling, Maori culture and humour, began in September 1990. In their first week of business the brothers took five people on their tour; by the end of the year they had 5000 clients. This success was a result of the Tamakis’ vision, hard work and personal sacrifice. As Mike explains, although there were opportunities for them to get outside funding for the project, the fact that they built their business based on their own zeal and personal sacrifices made them all the more determined to make it succeed. ‘There were possibilities for us to get government grants to kick-start an Indigenous business, but we didn’t want to go down that track because we wanted to start our own business on the same level playing field as anybody else who was going to start a business. The HarleyDavidson was a sacrifice and from there on in there were many other sacrifices. We were always undercapitalised. We had dreams of getting bigger and bigger, but whenever we needed to spend money, we had no money left. So we learned to do business the real way, along the road of hard knocks.’ One of the Tamakis’ tours was a three-day excursion into the Ureweras. This national park, known for its ruggedly beautiful forest, is about as far removed from civilisation as you can get. It was this tour that ‘turned us inside out’, says Mike. The brothers had hired a Tuhoe (a local Maori tribe) guide. ‘He was a big guy, heavily tattooed, with dreadlocks and missing teeth. He had a huge smile and he loved the land and the people on the tour. As we got to the edge of the forest he would jump out and do a karakia (prayer). We went through the Urewera Forest and he completely reinterpreted

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everything. He spiritualised everything – the mountains, the trees, the forest, the sky, the land – and put the tourists into the environment. Once we finished this three-day tour we were on a whole different spiritual plane.’ The Urewera tours became a turning point for the company. Mike and Doug realised that they wanted an authentic, spiritualised Maori cultural experience to be the centrepiece of their business, rather than as an adjunct. The brothers took a step back and looked at the infrastructure of their company. They solicited outside help from a business manager and devised a three-year development plan. They perceived that there was a market opportunity for an authentic hangi (ground-oven cooked) meal and concert in a marae (traditional meeting place) setting. The philosophy behind this specialisation was twofold. First, there was a niche in the market and the brothers had received feedback from tourists indicating that the hotel-based concerts seemed staged and plastic. Second, the brothers wanted to get local maraes working again. Mike and Doug then sought backing from local iwi (tribe) for access to a marae for their tour. After visiting a dozen marae in the area, speaking about their vision and ensuring that marae protocol would not be compromised, one site agreed to work with the brothers. As part of their new tour, the brothers brought busloads of tourists to the marae where they were fed a traditional hangi meal, entertained with live song and dance and given hands-on, participative insight into Maori culture. However, the marae tour soon proved too successful. Because of the ever-burgeoning numbers of visitors it quickly became too taxing on the marae. The tour was running seven days a week and it soon began to overshadow and interfere with all the other activities in which the local iwi were involved. It was obvious to the brothers they would have to develop their own site for a marae experience. By coincidence, their bus broke down one day alongside a piece of land that appeared to be a perfect spot for such a development. It was in native forest and was the site of an ancient fortified pa (Maori village). The land was owned by a Maori trust that was enthusiastic about supporting the development. It was never smooth sailing for the brothers. They were developing a product that represented a traditional and sacred culture and this meant that they had to be commercially aggressive and culturally sensitive. There was always going to be a degree of apprehension and tension associated with the Tamakis’ vision of a commercial tourism enterprise, based in large measure on concerns that the culture could end up being compromised. For many years Maori had seen their culture bastardised in order to provide a clean, neat tourism industry package. Elders did not want to see similar misrepresentations in the Tamakis’ business. There are also many important and sacred protocols associated with the marae which must be observed and respected. Therefore, a consultative process was paramount, one where iwi could express their concerns and expectations and the Tamakis could address and reconcile these. Six months of consultation with local kaumatua (elders) took place in order to ensure that the tourism development was culturally appropriate, while still being commercially viable. In 1994 the Tamaki Maori Village began operations. By 1998, it had won both the Maori Tourism Award and New Zealand’s Supreme Tourism Award. The awards bear testament to the development and popularity of a thriving Maori business. The village has also recently developed and opened a Tribal Arts and Crafts Market Place encompassing eight shops and a cafe´ where unique Indigenous arts and crafts are manufactured. The Market Place provides local Maori artists with the opportunity to own their own small business. In addition to employing Maori and providing the opportunity for local Maori artists to own their own businesses, the Village has other far-reaching benefits for both local Maori and Maori more generally. For example, the Village actively encourages the study of Maoritanga (the Maori culture). The Village also provides a vital opportunity for urban Maori, many of whom have been disenfranchised from their culture, to be reacquainted with its richness and warmth. By avoiding traditional stereotypes and settings, the Village authenticates Maori cultural tourism and gives it back the spirituality which is lacking when portrayed in a hotel setting. This authenticity is setting a benchmark for other tour operators, which, in turn, will break many of the Maori stereotypes that have been prevalent in the industry. Source: ‘A Living Culture, Tamaki Maori Village’, http://cullin.org/cbt/index.cfm?section¼chapter&number¼11

QUESTIONS

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How did the Tamaki brothers use their cultural heritage in starting their business? Do you think this was to their advantage when assuring success? How does a policy of enterprise culture fit in with the success of the Tamaki brothers? How did the Tamaki brothers manage to combine the need to be culturally sensitive and commercially aggressive? Do you think their solution was agreeable?

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ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. bribery corruption 1 2

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Does your home country rank in the top 10 or bottom 10 list of corrupt countries? Read ‘Dirty hands make business hard work’, Management Today (1 November 2011, p. 46). What is the worst act of bribery listed in this article? Search (bribery entrepreneurs) for academic journals and you will find: de Jong, Gjalt, Phan Anh Tu and Hans van Ees, ‘Which entrepreneurs bribe and what do they get from it? Exploratory evidence from Vietnam’, Entrepreneurship: Theory and Practice, March 2012, pp. 323þ. In the article, search for ‘bribery is key for entrepreneurs’. What are the arguments that entrepreneurs should engage in bribery? Search (environmental crime) in News. What are the environmental crimes discussed in these articles? Find Cook, Beth, Chris Dodds and Mitchell, William Lendrum (American military pilot), ‘Social entrepreneurship – false premises and dangerous forebodings’, Australian Journal of Social Issues, 38(1) (2003), pp. 57þ. What do the authors mean when they say that social entrepreneurship is ‘indistinguishable from neo-liberalism’?

ANSWERS TO ‘KNOWING THE DIFFERENCE’ a b c d e

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ENDNOTES 1 For a deeper look at social entrepreneurship, see Handbook of research methods on social entrepreneurship, Elgar Original Reference. Northampton, MA: Edward Elgar Pub., 2012; Asratie, Dessalew.

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Handbook of research on social entrepreneurship, edited by A. Fayolle & H. Matlay. Journal of Community Practice, 21(4) (2013), 509–11; Church, L. & J. A thirst for change: How social entrepreneurship can make the world a

better place. 1st ed. La Jolla, CA: Church Family Productions, 2011; Commission, European Union. Social economy and social entrepreneurship: Social Europe guide. Vol. 4. Director General for Employment. Social Affairs and Inclusion.

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Brussels (2013); de Bruin, A. & Shaw, E. Social innovation and social entrepreneurship: Extending theory, integrating practice. International Small Business Journal, 29(1) (2011), 3–3; Di Zhang, D. & Swanson, L. A. Social entrepreneurship in nonprofit organizations: An empirical investigation of the synergy between social and business objectives. Journal of Nonprofit & Public Sector Marketing, 25(1) (2013), 105–25; Durieux, M. B. & Stebbins, R. A. Social entrepreneurship for dummies. Hoboken, NJ: Wiley Pub., 2010; Fayolle, A. & Matlay, H. Handbook of research on social entrepreneurship. Elgar Original Reference. Cheltenham, UK; Northampton, MA: Edward Elgar, 2010; Gawell, M. & Sundin, E. Social entrepreneurship, gendered entrepreneurship? In Social Entrepreneurship, 273–91: Springer, 2014; Katzenstein, J. & Chrispin, B. R. Social entrepreneurship and a new model for international development in the 21st century. Journal of Developmental Entrepreneurship, 16(1) (2011), 87–102; Kickul, J. R. & Lyons, T. S. Understanding social entrepreneurship: The relentless pursuit of mission in an ever changing world. New York: Routledge, 2012; Kury, K. Wm. Sustainability meets social entrepreneurship: A path to social change through institutional entrepreneurship. International Journal of Business Insights & Transformation, 4 (2012), 64–71; Lepoutre, J., Justo, R., Terjesen, S. & Bosma, N. Designing a global standardized methodology for measuring social entrepreneurship activity: The Global Entrepreneurship Monitor Social Entrepreneurship Study. Small Business Economics, 40(3) (2013), 693–714; Lundstro¨m, A. & Zhou, C. Rethinking social entrepreneurship and social enterprises: A three-dimensional perspective. In Social Entrepreneurship, 71–89: Springer, 2014; Lundstro¨m, A., Zhou, C., von Friedrichs, Y. & Sundin, E. Social entrepreneurship: Leveraging economic, political, and cultural dimensions. Springer International Publishing, 2014; Newbert, Scott L. Building theory in social entrepreneurship. Journal of Social Entrepreneurship, 5(3) (2014), 239–42; Petit, P. Uwe. Creating a new civilization through social entrepreneurship. New Brunswick, NJ: Transaction Publishers, 2011; Pierre, A., von Friedrichs, Y. & Wincent, J. A review of social entrepreneurship research. In Social Entrepreneurship, 43–69: Springer, 2014; Praszkier, R. & Nowak, A. Social

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entrepreneurship: Theory and practice. Cambridge; New York: Cambridge University Press, 2011; Sampson, D. N. Social entrepreneurship. New York: Nova Science Publishers, 2011; Seelos, C., Mair, J., Battilana, J. & Dacin, M. T. The embeddedness of social entrepreneurship: Understanding variation across local communities. Research in the Sociology of Organizations, 33 (2011), 333–63; Sommerrock, K. Social entrepreneurship business models: Incentive strategies to catalyze public goods provision. Houndsmill, Basingstoke, Hampshire; New York: Palgrave Macmillan, 2010; Terjesen, S., Lepoutre, J., Justo, R. & Bosma, N. Gem Report on Social Entrepreneurship – Executive Summary. 2011; Vyas, V., Raitani, S. & Mathur, V. K. Social entrepreneurship and institutional environment in an emerging economy. International Journal of Social Entrepreneurship and Innovation, 3(2) (2014), 106–21; Zahra, S. A., Newey, L. R. & Li, Y. On the frontiers: The implications of social entrepreneurship for international entrepreneurship. Entrepreneurship Theory and Practice, 38(1) (2014), 137–58. 2 Gold, S., Hahn, R. & Seuring, S. Sustainable supply chain management in ‘base of the pyramid’ food projects – A path to triple bottom line approaches for multinationals? International Business Review, 22(5) (2013), 784–99; Milne, M. J. & Gray, R. W(H)Ither ecology? The triple bottom line, the Global Reporting Initiative, and corporate sustainability reporting. Journal of Business Ethics, 118(1) (2013), 13–29; Sherman, W. R. The triple bottom line: The reporting of ‘doing well’ and ‘doing good’. Journal of Applied Business Research, 28(4) (2012), 673–81; Tullberg, J. Triple bottom line – A vaulting ambition? Business Ethics: A European Review, 21(3) (2012), 310–24; Dixon, S. E. A. & Clifford, A. (2007). Ecopreneurship – A new approach to managing the triple bottom line. Journal of Organizational Change Management, 20(3), 326–45; Elkington, J. (2006). Governance for sustainability. Corporate Governance: An International Review, 14(6), 522–59; Elkington, J. (2007). The power of disruption, Editorial, Director (vol. 60), 24; Schlange, L. E. (2009). Stakeholder identification in sustainability entrepreneurship. Greener Management International, 55, 13–32; Thompson, J. & Doherty, B. (2006). The diverse world of social enterprise: A collection of social enterprise stories. International Journal of Social Economics, 33(5/6), 361–75.

3 Tyson, L. (2004). Good works – With a business plan: B-schools are now fostering ventures with a social mission. Business Week, May, http:// www.businessweek.com. 4 Drayton, B. (2001). Social entrepreneurs. The Jobs Letter, 147, 27 June, http://www.jobsletter.org.nz; see also Dees, J. G. (2001). Social entrepreneurship. In J. G. Dees, J. Emerson & P. Economy (eds), Enterprising nonprofits: A toolkit for the social entrepreneur, New York: Wiley, 1–18. 5 Dees, J. G. (1998). The meaning of social entrepreneurship. Stanford University: Draft report for the Kauffman Center for Entrepreneurial Leadership, 1–6. 6 What is a social entrepreneur? Ashoka, http://ashoka.org/social_entrepreneur. 7 Alvord, S. H., Brown, D. L. & Letts, C. W. Social entrepreneurship and societal transformation: An exploratory study. Journal of Applied Behavioral Science, 40(3) (2004), 260–82; Miller, T. L. & Wesley, C. L. II Assessing mission and resources for social change: An organizational identity perspective on social venture capitalists’ decision criteria. Entrepreneurship Theory and Practice, 34(4) (2010), 705–33; Desa, G. Resource mobilization in international social entrepreneurship: Bricolage as a mechanism of institutional transformation. Entrepreneurship Theory and Practice, 36(4) (2012), 727–51. 8 Own analysis of Global Entrepreneurship Monitor 2010 data. Used with permission of GEM (an international consortium of 70 countries in 2013). 9 Lepoutre, J., Justo, R., Terjesen, S. & Bosma, N. Designing a Global Standardized Methodology for Measuring Social Entrepreneurship Activity; Terjesen, S., Lepoutre, J., Justo, R. & Bosma, N. (2011). GEM Report on Social Entrepreneurship – Executive Summary. Global Entrepreneurship Research Association (GERA); Harding, R., Brooksbank, D., Hart, M., Jones-Evans, D., Levie, J., O’Reilly, M. & Walker, J. (2006). Global Entrepreneurship Monitor United Kingdom 2005, Foundation for Entrepreneurial Management, London Business School; Harding, R. Social Entrepreneurs Specialist Summary 2006, http://www.gemconsortium.org. 10 Bornstein, D. (2007). How to change the world: Social entrepreneurs and the power of new ideas. Oxford: Oxford University Press, 244. 11 Harding, R. (2005). Global Entrepreneurship Monitor: United

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N., Barrett, R. & Meyer, M. (2011). Forms of capital, intra-ethnic variation and Polish entrepreneurs in Leicester. Work, Employment and Society, 25(1), 101–17; Volery, T. (2007). Ethnic entrepreneurship: A theoretical framework. Handbook of research on ethnic minority entrepreneurship: A coevolutionary view on resource management, 30; Wang, Q. (2010). Immigration and ethnic entrepreneurship: A comparative study in the United States. Growth and Change, 41(3), 430–58. 55 Scase, R. & Goffee, R. (1980). The real world of the business owner. London: Croom Helm, 29, cited in Willsdon, J. (2005). Homosexual entrepreneurs: Different but the same. Irish Journal of Management, 26(1), 107–22; Shapero, A. (1975). The displaced, uncomfortable entrepreneur. Psychology Today, November, 83–8; Stanworth, M. J. K. & Curran, J. (1976). Growth and the smaller firm: An alternative view. Journal of Management Studies, 13, 95–110; Hagen, E. E. (1962). On the theory of social change, Homewood, IL: The Dorsey Press; Gurr, T. R. & Woodrow Wilson School of Public and International Affairs. Center of International Studies. (1970). Why men rebel. Princeton, NJ: Published for the Center of International Studies, Princeton University by Princeton University Press; Lipset, S. M. (1981). Political man: The social bases of politics (Expanded ed.). Baltimore: Johns Hopkins University Press; Runciman, W. G. (1972). Relative deprivation and social justice: A study of attitudes to social inequality in twentiethcentury England. Harmondsworth: Penguin; Rydgren, J. & Ruth, P. (2011). Voting for the radical right in Swedish municipalities: Social marginality and ethnic competition? [Article]. Scandinavian Political Studies, 34(3), 202–25. 56 United Nations Permanent Forum on Indigenous Peoples. Factsheet: Indigenous peoples, Indigenous voices, http:// www.wipce2008.com/enews/pdf/ wipce_fact_sheet_21-10-07.pdf. 57 Licensed under the GNU Free Documentation Licence from the Wikipedia article ‘Indigenous Peoples’. 58 Peredo, A. M., Anderson, R. B., Galbraith, C. S., Honig, B. & Dana, L-P. (2004). Towards a theory of Indigenous entrepreneurship. International Journal of Entrepreneurship and Small Business, 1(1/2), 1–20. 59 In accordance with Indigenous practice, a capital ‘A’ and a capital ‘I’ are used in the words Aboriginal and Indigenous. When we speak of American

or European we apply the formal noun and adopt the capital A and E, subsequently the Indigenous people of Australia ask that you also apply the same practice. We as Aboriginal people request that you also provide this formal respect in the use of capitals. 60 Australian Bureau of Statistics (ABS). Aboriginal and Torres Strait Islander population nearing 700,000, http:// www.abs.gov.au/ausstats/[email protected]/ latestProducts/3238.0.55.001Media% 20Release1June%202011. 61 Trudgen, R. (2000). Why warriors lay down and die. Aboriginal Resource and Development Services Inc. Darwin; Mitchell, S. (1995). Foreign contact and Indigenous exchange: Networks on the Cobourg Peninsula, North-western Arnhem Land. Australian Aboriginal Studies, (2), 44–8; Tinedale, N. (1974). Aboriginal tribes of Australia: Their terrain, environmental controls, distribution, limits, and proper names. University of California Press, LA, London; cited in Shoebridge, Amanda, Buultjens, Jeremy, Peterson & Lila Singh, Journal of Developmental Entrepreneurship, September 2012, 17(3), 1–31. 62 Furneaux, C. & K. Brown (2007). Indigenous entrepreneurship: An analysis of capital constraints, AGSE, 2007, 669–82. 63 Builth, H. (2002). The archaeology and socioeconomy of the Gunditjmara: A landscape analysis from southwest Victoria, Australia. Unpublished Doctoral Thesis, Department of Archaeology, Flinders University, Adelaide, 8–12; Salleh, A. (2003). Aborigines may have farmed eels, built huts. News in Science, ABC Science Online, 13 March, 1–2, http://www.abc.net.au/science/news/ stories/s806276.htm. 64 Diamond, J. (1999). Guns, germs and steel: The fates of human societies. New York: W.W. Norton and Company, 18–22; Hegarty, S. (2011). Aboriginal Stonehenge: Stargazing in ancient Australia. BBC News Magazine. Retrieved from http://www.bbc.co.uk/news/ magazine-15098959. 65 ATSIC. (1998). As a matter of fact. Canberra: Australian Government Publishing Service, 60–1; Fisk, E. K. (1985). The Aboriginal economy in town and country. Sydney: Allen & Unwin; Hunter, B. (1999). Three nations, not one: Indigenous and other Australia poverty. CAEPR Working Paper, Canberra: The Australian National University. 66 Australia. Productivity Commission, Overcoming Indigenous Disadvantage,

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Key Indicators 2014, http:// www.pc.gov.au/research/recurring/ overcoming-indigenous-disadvantage/ key-indicators-2014 Section 1.4; Michael Gordon. Landmark report reveals scale of indigenous disadvantage. Sydney Morning Herald, 19 November 2014, http:// www.smh.com.au/federal-politics/ political-news/landmark-report-revealsscale-of-indigenous-disadvantage20141119-11p6j9.html. 67 Australia. Productivity Commission. Overcoming Indigenous Disadvantage, Key Indicators 2014, http:// www.pc.gov.au/research/recurring/ overcoming-indigenous-disadvantage/ key-indicators-2014 Table 4A.6.1, http:// www.pc.gov.au/research/recurring/ overcoming-indigenous-disadvantage/ key-indicators-2014/04-key-indicators2014-chapter4-attachment.xlsx. 68 Down, Simon. Evaluating the impacts of government policy through the long view of life history. Entrepreneurship and Regional Development, 24(7–8) (2012), 619–39; Foley, Dennis & Allan John O’Connor. Social capital and the networking practices of indigenous entrepreneurs. Journal of Small Business Management, 51(2) (2013), 276–96; Foley, Dennis. The function of social (and human) capital as antecedents on Indigenous entrepreneurs networking. New Zealand Journal of Employment Relations, 35(1) (2010), 65–87; Krivokapic-Skoko, B., T. Trudgett, S. Pearce, M. Morrison, J. Collins, P. K. Basu, I. Ramos & A. Mesquita. Understanding the Australian Indigenous entrepreneurs through narratives. In Proceedings of the 12th European Conference on Research Methodology for Business and Management Studies, edited by I. Ramos & A. Mesquita. Reading, UK; Guimaraes, Portugal. UK: Academic Conferences and Publishing International Limited; Shoebridge, Amanda, Jeremy Buultjens & Lila Singh Peterson. Indigenous entrepreneurship in Northern NSW, Australia. Journal of Developmental Entrepreneurship, 17(3) (2012), 1–31; Foley, D. (2006). Indigenous Australian entrepreneurs: Not community and not in the outback. Centre for Aboriginal

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Economic Research, the Australian National University DP. 279/2006, Canberra: Centre for Aboriginal Economic Research; Hindle, K. & Rushworth, S. (2003). Focus report: Indigenous entrepreneurship in Australia. Sensis GEM Australia, 2002. Melbourne: Australian Graduate School of Entrepreneurship, Swinburne University of Technology, 41–4. 69 The Maori language (te reo) is one of two officially recognised languages in New Zealand – the other being English. Long vowels in Maori are marked with a macron (bar across the top of a vowel). 70 Sutch, W. B. (1964). The M aori economy: A survey to the time of the coming of the European. A paper prepared for the opening address to the New Zealand Federation of Maori Students, Victoria University of Wellington, Wellington. 71 Firth, R. W. (1929). Primitive economics of the New Zealand M aori. New York: E. P. Dutton and Company, 183; Firth, R. W. (1972). Economics of the New Zealand M aori (2nd edn). Wellington: A. R. Shearer, Govt. Printer, 183. 72 Frederick, H. (2005). Global Entrepreneurship Monitor Aotearoa New Zealand, 2005. Unitec School of Management & Entrepreneurship Research Report Series, 4(1), Auckland: Unitec New Zealand, 10, http:// www.gemconsortium.org. Note: This research was funded by the Ministry of Maori Development. 73 Bargh, Maria. A Blue Economy for Aotearoa New Zealand? Environment, Development and Sustainability, 16(3) (2014), 459–70; Bargh, M. Rethinking and re-shaping Indigenous economies: Maori Geothermal Energy Enterprises. Journal of Enterprising Communities: People and Places in the Global Economy, 6(3) (2012), 271–83. Based upon Pauli, Gunter A. (2010).The Blue Economy: 10 Years, 100 Innovations, 100 Million Jobs. Paradigm Publications. 74 This inter-species cooperation, known locally as ‘the law of the tongue’, stems apparently from the Aboriginal Nullica people who had a strong spiritual

relationship with the killer whales before the advent of European whaling. This was reinforced by Maori whalers who arrived to assist in the kill. See Toft, Klaus (Producer) (2007). Killers in Eden (DVD documentary). Australian Broadcasting Corporation; Danielle Clode (2002). Killers in Eden, Allen and Unwin ISBN 1-86508652-5; Pritchard, G. R. Econstruction: The nature/culture opposition in texts about whales and whaling. Deakin University PhD. Thesis, 2004; Oswald Brierly (1842– 8). Diaries at Twofold Bay and Sydney. State Library of New South Wales, MLA503-541; H. S. Hawkins & R. H. Cook (1908). Whaling at Eden with some ‘killer’ yarns. Lone Hand, 265–73; Brady, E. J. (1909). The law of the tongue: Whaling, by compact, at Twofold Bay. Australia Today, 1 December, 37–9; Tom Mead (1961). Killers of Eden. Angus and Robertson. 75 Cited in Coleman, Martin (1985). Benjamin Boyd and the killer of Twofold Bay. This Australia, 4(2), 34–9. 76 Holcomb, J. (2013). Early merchant families of Sydney: Speculation and risk management on the fringes of empire. Melbourne: Australian Scholarly Publication, 257–8. 77 Mead (1961). Killers of Eden. 78 Geoffrey Scott. The mystery of a vanished adventurer. Sydney Morning Herald, 19 December 1953; Survey Ship, HMS Herald: Historic Voyages. Sydney Morning Herald, 1 March 1924. 79 van der Kroef, J. M. Some headhunting traditions of southern New Guinea. Anthropologist, 54(2) (Apr–Jun 1952), 221–35; Villagers apologize for eating missionary, http:// www.thatsweird.net/news19.shtml; Bruce M. Knauft (1999). From primitive to postcolonial in Melanesia and anthropology. University of Michigan Press. p. 104. ISBN 0-472-06687-0. 80 Jack London (1911). The cruise of the Snark. Harvard University Digitized, 19 January 2006. 81 Mead, Tom (1994). Empire of straw: The dynamic rise & disastrous fall of dashing colonial tycoon Benjamin Boyd. Sydney: Dolphin Books.

ENTREPRENEURIAL CASE ANALYSIS

PART 1

 INDIGENOUS MAORI ENTREPRENEURS IN SCREEN PRODUCTION1 Ella Henry Introduction Recent research provides examples of ways that Indigenous Maori entrepreneurs are contributing to cultural, linguistic and economic revitalisation for themselves and their communities. This case study focuses on two organisations and their owners, who were part of a study on Maori entrepreneurs in screen production.2 Maori are the indigenous people of New Zealand. Polynesian settlers arrived in Aotearoa (in te reo, or Maori language, ‘Land of the Long White Cloud’) about the tenth century. Aotearoa was visited briefly by the Dutch navigator Abel Tasman in 1642. However, it was not until 1769 that the British naval captain James Cook and his crew became the first Europeans to thoroughly explore New Zealand’s coastline. Maori have a history of enterprise upon which to draw. Prior to colonisation, Maori were highly entrepreneurial, being actively engaged in trade with Europeans, nationally and internationally.3 Maori were involved with export of produce to Australia and various other countries and have always been fervent adopters of innovations, as in the Maori saying ‘Ka pu te ruha ka hao te rangatahi’ (The old net lies in a heap while the new net goes fishing). Thus, early relations between Maori tribes and the Pakeha (pale-skinned foreigners) had been primarily positive since the arrival of Cook. The new country was formally annexed as a British colony after the signing of the Treaty of Waitangi, between the Crown and Chiefs on 6 February 1840.

Entrepreneurial case analysis

However, after the colony came under British control, the introduction of repressive legislation controlling the Maori economy saw a reduction in Maori trade and commerce. Well known is the Maori uptake of muskets to the great cost of the settler forces. Alongside this, the influx of new settlers increased pressure on tribes to sell more and more land. Eventually, Maori rebelled, and the Land Wars, beginning in the 1850s, erupted.4 Tribes that fought against the government (and some that did not) had large tracts of their land confiscated. This had a dramatic and negative effect on Maori people, and their economy. From the 1870s Maori suffered the ongoing effects of poverty, land loss and the diminution of Maori language and culture, as assimilationist policies were introduced into New Zealand.5 To the closing decades of the twentieth century, Maori were overrepresented among the impoverished, unemployed, undereducated and incarcerated.6 Alongside these negative impacts, since the 1970s Maori saw rekindling of their language and culture, emerging out of the Maori Renaissance,7 which saw a rise in activism and protest, calls for the Treaty of Waitangi to be honoured and increasing aspirations for selfdetermination and sovereignty. The rise in self-confidence and the introduction of reparation payments have had a positive impact on all Maori, and as can be seen in this case study on the burgeoning screen industry. In the earliest years of film, Maori were more likely to appear as noble savages and objects of European curiosity, which was reflected in the images of Maori culture and

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society that were conveyed to the wider world. It was similar in television, which was first introduced to New Zealand in 1960. It was the work of stout-hearted individuals, who broke down the barriers, often with the help of supportive Pakeha in positions of power, which has created the domain we can now refer to as the Maori screen industry. In recent decades there has been a proliferation of Maori storytelling in film and television. These opportunities have arisen as a consequence of Maori activism and appeals to the Waitangi Tribunal and successive governments, which has resulted in the creation of organisations by the Crown, such as Te Mangai Paho (1993), and the Maori Television Service (2004). These organisations have been complemented by Maori-led initiatives from those in the industry, such as Te Manu Aute and Nga Aho Whakaari.8 It is in this milieu that this study presents two Maori entrepreneurs who own (or co-own) their own production companies that have been in existence for five or more years, have influenced other media entrepreneurs, have produced a significant body of work (in excess of $NZ1 million) with a strong Maori-focus, e.g. in Te Reo Maori (the Maori language), or from a distinctly Maori perspective. These two people and their companies are examples of Maori whose body of work has enhanced the revitalisation of Maori language and culture, while also creating robust businesses that employ and train Maori, create wealth and contribute to the New Zealand economy and Maori entrepreneurship.9 They have also served as Maori norm entrepreneurs (see Chapter 3) in the sense that they are interested in changing social norms. Through their media efforts that have created ‘norm bandwagons’ and ‘norm cascades’, they have contributed to substantial changes in social norms and to (self-)perceptions of Maori in the modern New Zealand context.

Cases Nicole Hoey: Company Owner, Cinco Cine Film Productions Limited Tribal Affiliations, Ngati Kahu and Te Aupouri Nicole was born in Kaikohe, in Northland, to a Maori mother and a Pakeha father, at a time when this was neither common nor fashionable. Her mother’s family were committed to education, sending her mother and aunts to be educated at the then prestigious Maori girls’ school, Queen Victoria College in Auckland. Her father’s family were entrepreneurial, owning a bakery in Kaikohe, where her father was a pastry chef.

Entrepreneurial case analysis

Nicole played representative (league) hockey from an early age. Because Queen Victoria College did not have a hockey team, Nicole and her sister were sent instead to board at Diocesan Girls’ School, an exclusive private school in the wealthy eastern suburbs of Auckland. There were few Maori at the school, and Nicole’s cousins, who were students at Queen Victoria, would come to visit on the weekends. One of her cousins, Ripeka Evans, went on to work in TVNZ and assist with the setting up of the Kimihia program (a community program providing education for young people at risk) in the 1980s. Nicole attributes hockey with nurturing her competitive spirit, teaching her the value of losing and never giving up, and contributing to her entrepreneurship. Nicole formed Cinco Cine when she was twenty-four after working on television productions since leaving school. For the first ten years, Cinco Cine was primarily a producer of TV commercials. It was not until her son was born, in 1989, that she became more interested in Te Reo Maori, and she began making Maori-centric programs from 1995, in part for her son and his friends who were enrolled in Maorilanguage immersion education (Kura Kaupapa Maori). Nicole has structured her company along similar lines to the National Kohanga Reo Trust, to reflect her passion for whanau (family), hap u (sub-tribe) and iwi (tribe), tamariki (children) and Te Reo (language), which is also reflected in orero Mai and Whanau, the programs they make, such as K dramas created to teach Maori language. Her company also ukana, Ihumanea, Koina te Korero and Sponge produced P Bob Square Pants in Te Reo, to appeal to children and youth. Cinco Cine has produced a tele-feature Kawa, based on the novel Nights in the Garden of Spain, by renowned Maori author, Witi Ihimaera, and a comedy series entitled Brown Bruthaz, about a hip-hop duo. Nicole’s competitive nature underpins her business strategy; that is, to build the production scope and capacity of Cinco Cine, within a Kaupapa Maori framework (a social theory of knowledge and liberation), telling Maori stories, and employing and training many hundreds of Maori since she began. Nicole is also active in industry organisations; she sat on the Executive, and was Treasurer of Nga Aho Whakaari (the association of Maori in screen production), and the New Zealand on Air Board, the government broadcasting funding agency; was President of SPADA (Screen Producers and Directors Association) for two years; and Deputy Chair of the New Zealand Screen Council for two years. Cinco Cine: http://www.cincocine.co.nz

154 Part 1: Entrepreneurship in the twenty-first century

Brad Haami Tribal affiliations: Ngati Awa, T uwharetoa, Ngati Kahungunu and Kai Tahu Co-owner of 4 Winds Productions and Tauihu Media Brad was born in a community surrounded by his tribal links and heritage, and raised for the first few years of his life by his grandfather, Dr Golan Maaka, a well-respected doctor in the isolated communities of Ngati Awa and Ngai T uhoe. His grandfather infused him with knowledge of Te Reo and Tikanga, the power of the written word, and the importance of ancient Maori stories. Brad was a sickly and shy child, but was convinced by his uncle Maanu Paul, a prominent Ngati Awa elder, to enrol in the Maori Journalism course that Maanu had helped create at Waiariki Polytechnic in Rotorua in 1986. The course changed Brad’s life, introducing him to a cohort of other young Maori wanting to work in the media, and forcing him to be more outgoing. A number of those graduates were employed at TVNZ, in the newly created Maori Department, where Brad worked with some of the early, staunch advocates for Maori storytelling and Maori language. Brad has published three books, a biography of his grandfather (Golan Maaka), a history of the Maori utea Whakairo), and a biography of an exwritten word (P gang member whom he met through his Church (True Red), and was selected as the Michael King Maori Writer in residence in 2010. In 2007, Brad researched and co-wrote Urutahi Koataata Maori: Working with Maori in Film and Television for Nga Aho Whakaari. Brad has had a partnership with Pio Terei, Ngamaru Reirino and Carey Carter, with whom he formed 4 Winds u Productions, which went on to produce the Matak television series, described as the Maori Twilight Zone, the first of which was produced by Kiwa Films. They went on to make three series between 2001 and 2005; winning international (2002 NAFAATA Film Festival USA, 2004 New York Festivals Television Programming Award) and national recognition (2003 NZTV Awards, 2005 Qantas TV Award). Episodes of Mataku can be viewed on NZ On Screen (http://www.nzonscreen.com/title/mataku-2001). Brad continues to write and develop feature film and drama projects in a variety of business partnerships. Brad’s most recent business venture is Tauihu Media, with Tui Ruwhiu, a ‘creative, multimedia business that is driven by the power of the story’. In 2010–11 they executive produced two Premier Shorts for the New Zealand Film Commission’s Short Film Fund. Brad remains a quiet, introspective man, primarily a writer, rather than a business-oriented producer. For him business is a means to

Entrepreneurial case analysis

an end, rather than a passion, but he enjoys the opportunity to work in a variety of different business collaborations. He continues to work with Ngamaru Reirino as a Maori consultant on television programs (e.g. Shortland Street), dramas (The Man Who Lost His Head, Tracker), and his own scripts (e.g. Waimarie). Brad was raised with a deep commitment to whakapapa (genealogy). Ironically, his wife and whangai (adopted) daughter are both Pacific Island, which he believes has helped him to move beyond a narrow focus on Maori identity and whakapapa. Brad has overcome his shyness through his writing and storytelling, which reflects his faith, his passion for sharing ancient Maori knowledge and his family. Tauihu Media: http://www.tauihumedia.com/about

Conclusion Despite their different backgrounds, tribal affiliations, early experiences and pathways into the media, both Nicole and Brad have made a firm commitment to Maori-language film and television. Throughout their careers they have learned their crafts, within the screen industry, and shared those skills with a new generation of Maori, producing a body of work that supports and enhances Maori language and culture, and contributing to the economic wellbeing of the nation. Their entrepreneurial intent has emancipated not only themselves, their families and their businesses, but contributed to the Maori Renaissance, affirming their beliefs and values, while enhancing those same values and beliefs for future generations of Maori.

Discussion questions 1 2 3

4

5

Who are and where are indigenous peoples in the world? Discuss the reasons why emancipatory entrepreneurship might be useful for indigenous peoples. Why and in what ways might the screen industry be a valuable sector for indigenous business and entrepreneurship? Explore the history of the New Zealand and the Maori people, and discuss the reasons why Maori might be entrepreneurial. Discuss the ways these two entrepreneurs have contributed to emancipation for themselves and Maori people.

Further online resources United Nations Defining Indigenous Peoples: http:// www.un.org/esa/socdev/unpfii/documents/ 5session_factsheet1.pdf

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Ashoka Foundation and Changemakers, Indigenous Entrepreneurs website: http://www.changemakers.com/ g20media/indigenousSMEs Indigenous community-based ecotourism conference paper: http://devnet.org.nz/sites/default/files/ Dr%20Trisia%20Farrelly.%20Indigenous %20community-based%20ecotourism%20as %20Indigenous%20Social%20Entrepreneurship %20(ISE).pdf

Indigenous Entrepreneurship Project website: http:// www.beac.st/in-English/Barents-Euro-Arctic-Council/ Projects/Featured-projects/Indigee International Handbook of Research on Indigenous Entrepreneurship: https://books.google.co.nz/books? id¼vaT_CwohxhwC&lpg¼PA3&ots¼g657anSA6Z& dq¼indigenous%20entrepreneurship&pg¼PP1# v¼twopage&q&f¼false

ENDNOTES 1 The Maori language (te reo) is one of two officially recognised languages in New Zealand – the other being English. Long vowels in Maori are marked with a macron (bar across the top of a vowel). 2 Henry, E. (2012). Wairua Auaha: Emancipatory Maori entrepreneurship in screen production. Doctoral Thesis, Auckland University of Technology, New Zealand. http://hdl.handle.net/10292/ 4085. 3 Petrie, H. (2006). Chiefs of industry: Maori tribal enterprise in early colonial New Zealand. Auckland: Auckland University Press. 4 Belich, J. (1988). The New Zealand Wars and the Victorian interpretation of racial conflict. Auckland: Auckland University Press.

Entrepreneurial case analysis

5 Walker, R. (1990). Ka whaia tonu matou: Struggle without end. Auckland: Penguin Books. 6 Douglas, E. M. K. (2001). Te Iwi Maori. Asia Pacific Viewpoint, 42(1), 17–25. Retrieved 15 January 2015 from http:// onlinelibrary.wiley.com/doi/10.1111/ 1467-8373.00128/abstract. 7 Walker, R. (1990). Ka whaia tonu matou. 8 Henry, E. & Wikaire, M. (2013). The Brown Book: M aori in screen production. Auckland: Nga Aho Whakaari Inc. (Available in iBook format from Apple App Store). 9 Frederick, H. & Henry, E. (2004). Innovation and entrepreneurship amongst Pakeha and Maori in New Zealand. In Stiles, C. & Galbraith, C. S. (eds). Ethnic

entrepreneurship: structure and process. International Research in Business Disciplines, Volume 4. Oxford, UK: Elsevier Ltd; Frederick, H. (2005). Global Entrepreneurship Monitor Aotearoa New Zealand. Available at http:// www.gemconsortium.org. Note: This research was funded by the Ministry of Maori Development; Henry, E. (2012). Wairua Auaha: Emancipatory Maori entrepreneurship in screen production. Doctoral Thesis, Auckland University of Technology, New Zealand. http:// hdl.handle.net/10292/4085.

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PART « TWO

INITIATING ENTREPRENEURIAL VENTURES

CHAPTER 5

CHAPTER 6

CHAPTER 7

CHAPTER 8

Pathways to entrepreneurial ventures

Opportunity and the creative pursuit of innovative ideas

Entrepreneurial families: succession and continuity

Developing entrepreneurship within organisations

Entrepreneurship

» CHAPTER FIVE PATHWAYS TO ENTREPRENEURIAL VENTURES CHAPTER OBJECTIVES

1 Every large and successful company was once a start-up struggling to survive. Some of these successful companies were conceived in a flash of inspiration and planned on the back of a napkin in a coffee shop. Others took shape painstakingly over time in a basement or a garage. Some start-ups were created and then flourished overnight, while others achieved success only through a long series of painful fits and starts. The point is, every company that exists today began rather small. Joel Kurtzman, Start-ups that Work1

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

To describe the major pathways that may lead to entrepreneurial ventures

2 To examine bootstrapping and minipreneurship as fast lanes to gaining entrepreneurial experience 3 To identify and discuss what is involved in acquiring an established venture that already has some entrepreneurial momentum 4 To outline key questions to ask when buying an ongoing venture that is already generating value 5 To define a franchise and outline its structure 6 To examine the benefits and drawbacks of franchising 7 To look at the route social entrepreneurs take to creating new ventures

Chapter 5: Pathways to entrepreneurial ventures 159

WALKING ENTREPRENEURSHIP PATHWAYS Every prospective entrepreneur, by definition, will at some stage be involved with launching and/or owning a new venture. There certainly are a variety of different pathways to experiencing entrepreneurship, including starting, purchasing or inheriting a business and being promoted or brought in to manage a business.2 In this chapter, we examine six common business entry pathways that you could follow: bootstrapping, minipreneurship, the conventional new-new and new-old options for business start-up, the acquisition of an existing venture, buying a franchise and establishing a social venture. Each pathway has its own compensations and rewards; there are also certain disadvantages and difficulties that have to be considered. It is unwise for an entrepreneur to rush into a decision without the proper understanding of the particular form of entry. This chapter is devoted to outlining some of the particular issues related to each pathway to gaining experience with entrepreneurship. Later, in Chapters 6, 7 and 8 we look at three other pathways that entrepreneurs come to enterprise – through creating and exploiting their own opportunities, through their entrepreneurial families and through their employers. And there are so many more pathways! Did you know that in the US 80 per cent of women entrepreneurs once sold Girl Scout cookies?3

On CourseMate Express read about illegal bootstrapping. How one entrepreneur got away with it.

BOOTSTRAPPING One common pathway trod by many prospective entrepreneurs is bootstrap entrepreneurship.4 Bootstrapping is a means of starting a new venture through highly creative acquisition and use of (sometimes other people’s) resources. Some people say that bootstrapping means starting a new business without financing. Bootstrapping relies greatly on networks, trust, cooperation and wise use of existing resources, rather than going into debt or giving away equity. Here are some tips that have come from experience: look for the ‘low-hanging fruit’; use a copycat idea; find quick, break-even, cash-generating products. Companies that are already making money are able to build credibility in the eyes of investors. Meanwhile, keep growth in check. Too many start-ups fail because they grow beyond their financial means. Focus on cash (not on profits, market share or anything else in the early stages). Because of their financial means bootstrapped organisations cannot afford to pursue a number of strategic goals – staying alive is the main objective. For example, bootstrapped companies cannot pursue prolonged loss-making strategies to build a market share or a customer base as cash will be quickly depleted. Having a healthy cash flow is critical to survival, so sales strategies must ensure healthy returns from the outset (see also the Entrepreneurship in Practice ‘Ways to find bootstrap capital’ in Chapter 14).5

A unique pathway. On CourseMate Express read about how ex-convicts started a hot dog enterprise called ‘Felony Franks’.

HOW TO BOOTSTRAP A BUSINESS Bootstrapping options for product development: • prepaid licences, royalties or advances from customers • special deals on access to product hardware • development of product at night and on weekends while working elsewhere • customer-funded research and development • turning a consultant project into a commercial product • least useful methods here are research grants and university-based research incubators.

ENTREPRENEURSHIP IN PRACTICE

cont.

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160 Part 2: Initiating entrepreneurial ventures cont.

Bootstrapping options for business development: • forgone, delayed or reduced compensation • working from home using personal savings • deals with professional service providers at below-competitive rates • space at below-market or very low rent • personal credit cards and home equity loans • least useful here are severance payments, barter and special terms with customers. Bootstrapping options to minimise the need for capital: • buy used equipment instead of new • borrow equipment from other businesses for short-term projects • use interest on overdue payments from customers • hire personnel for shorter periods instead of employing permanently • coordinate purchases with other businesses (mutual purchasing of goods) • lease equipment instead of buying • cease business relations with customers who frequently pay late • offer same conditions to all customers (no preferential treatment) • buy on consignment or trade credit from suppliers • deliberately choose customers who pay quickly • share business premises with others or run business out of your house • employ relatives or friends at non-market salaries • least useful are sharing of equipment and employees employed with other local businesses. Bootstrapping options to meet the need for capital: • withhold entrepreneur’s salary payment for short or long period of time • pay employees with company shares (give employees some ownership) • seek out best purchasing conditions with suppliers • deliberately delay payment to suppliers • use the entrepreneur’s private credit card for business expenses • obtain loans from relatives and friends • barter under-used products or services with other companies • franchise or license the product or business idea to others for a royalty fee • the least employed methods here include raising capital from a factoring company – through selling the company’s accounts receivable • another innovative way is called ‘invoice financing’. Under this system, a business outsources its invoices to another company, such as a bank, which pays most of their value immediately and takes on the burden of chasing up payments.6 Source: Kotelnikov, V. Bootstrapping: The most common source of initial equity for entrepreneurial firms, ª Vadim Kotelnikov. Used by permission. http://www.1000ventures.com/venture_financing/bootstrapping_methods_fsw.html.

BUSINESS ASSISTANCE FUNDING At the next level are those who take advantage of business development programs that are part of government (see Table 5.1). If small business is strong, the overall economy is strong. If small business is held back, the economy is held back. Money does not start new businesses. People start new businesses; but some money is usually required. The pathway of small and micro-businesses differs substantially from the typical path of larger small businesses.7 Ssewamala and Sherraden assert that technical assistance programs and institutions are key elements in the success of small businesses.8 These programs can help the bootstrapping entrepreneur gain greater access to economic programs, establish incentives to save money, provide information about local accounting and financial procedures and give mentoring and other forms of technical assistance.

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TABLE 5.1

BUSINESS DEVELOPMENT ASSISTANCE IN THE ASIA–PACIFIC

Asian Development Bank

http://www.adb.org

Australian Government Department of Industry and Science

http://www.business.gov.au/Pages/ default.aspx

Brunei Directory and Information Portal

http://www.onebrunei.com

Business Enterprise Centres Australia

http://www.becaustralia.org.au

Korea, Small & Medium Business Administration

http://www.smba.go.kr

Malaysia, SME Corp Malaysia

http://www.smecorp.gov.my

Malaysia, Ministry of International Trade and Industry

http://www.miti.gov.my

New Zealand business information

http://www.business.govt.nz

Philippines Department of Trade and Industry

http://www.dti.gov.ph

Singapore International Enterprise

http://www.iesingapore.gov.sg

SPRING Singapore

http://www.spring.gov.sg/

Thailand, Office of Small and Medium Enterprises Promotion (OSMEP)

http://www.sme.go.th

For example, Thailand has embarked on spending projects with the intention of supporting community economic development. One of the most successful entrepreneur creation programs has been OTOP (One Tambon [village], One Product). Rather than providing easy credit, OTOP focused on creating markets of community entrepreneurs and assisting in exports.9 There is ample evidence showing that the start-up sector has a high failure rate in the first three years of business, so access is vital to business information, training programs, business referrals, government programs, business networks, workshops and seminars, mentoring support and business analysis. Especially important to bootstrap entrepreneurs are business incubators and access to finance.

MINIPRENEURSHIP Another pathway to launching an entrepreneurial career is online minipreneurship.10 Minipreneurs are consumers who create, produce and trade goods, services and experiences rather than merely consuming them. Imagine that you could look inside Google on any given day. In Singapore on that day there might be only 10 people on the island looking for edible ink (for cake decorating) or vinyl (record collectors) or sources of funding (for their businesses). Thousands of entrepreneurs start out trading on online auction websites and make interesting businesses selling niche products to gap markets. It is ideal because accounting, promotion and marketing are largely taken care of. The minipreneur can focus then on inventory, fulfilment and, most importantly, new business models. Minipreneurs keep costs down by availing themselves of low-cost online products and services, such as Skype for phone calls or Paypal for accepting credit card payments. Others take advantage of programs such as Google AdSense and other online advertising schemes that allow them to earn additional income streams. Graduating from that and using their own off-the-shelf e-commerce software, many people are launching their own online businesses. It has never been easier to set up a ‘miniprise’ to service those niche needs in the Long Tail. Niche is the new mass as consumerism is now more about standing out, not conforming to trends. Long Tail businesses aggregate products in niche markets. They only need a few thousand people in the entire world to be interested in what they offer.

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What are the main drivers behind this trend towards minipreneurship? Resources once exclusively available to multinationals, from access to marketplaces to partnering with top talent, are now at the fingertips of experienced, entrepreneurial individuals. Consumers are discovering that they can make a buck by doing their own manufacturing, enterprising, venturing, selling, trading or auctioning. Being one’s own boss, even if it is only for a few hours a week, is just too tempting to forgo, as is the extra income. In essence, minipreneurship is chic. Minipreneurs have a highly developed network of intermediaries, tools, resources and processes at their disposal. It is an elaborate market system of co-dependent entrepreneurs. Minipreneurs have access to hardware, software, information and communications technology and skills, design, production and manufacturing, extensive marketplaces, advertising, talent, finance, payment and logistics.11 Minipreneurs get their business up and running instantly, relying on everything from rock-bottom priced laptops, printers and open-source software, to broadband connections and free telephony. Take humble salt, for example. You can go online and scoop up hundreds of gourmet varieties from sulphurous Indian black salt to flaked pink salt from Australia’s Murray River basin, all marketed by enterprising minipreneurs.12 If you are working online the only limits are your own imagination and a clever new business model. There is really no need for an office. In many cities in Asia, the world’s largest established culture of minipreneurship, wireless cafes are full of business owners with their laptops, meeting contacts or managing their inventory. Minipreneurship is already an established career option understood by any youngster.

THE RISE OF THE MINIPRENEUR The website http://www.trendwatching.com coined the term ‘minipreneurs’, embracing small and micro-businesses, freelancers, co-creators, eBay traders, Web-driven entrepreneurs, mumpreneurs, solopreneurs, advertising-sponsored bloggers, free agents, weekend entrepreneurs, seniorpreneurs and so on. A minipreneur is a person whose business is based IN PRACTICE on the expert knowledge or experience that person has acquired and how they leverage the Internet. Now entrepreneurship encompasses exciting ventures that can be accessed and marketed through online tools around the world. The top minipreneurial businesses are eBay, blogging, podcasting, online stores, online training, freelance research, copy writing and editing, consultancies and transcription services. Minipreneurs are waking up to the reality that through manufacturing, enterprising, selling and trading, wealth and self-employment are at their fingertips. Having control over one’s destiny is an appealing prospect. Despite living in times of greater risk and uncertainty, people seek independence and the chance to develop a portfolio of revenue streams. One of the main problems with being a minipreneur is isolation. A solution to this is to form a MasterMind group. The basic premise is that more can be accomplished in less time by working together in a small group of supportive colleagues. The collective wisdom of the group – often called ‘the third mind’ or ‘synergy’ – moves you beyond your individual perspectives to create ideas and ‘Aha!’ moments that often leapfrog your business to new heights of success. With minipreneurship being the trend of future entrepreneurs, a potential gap in the marketplace exists for those facilitating to such individuals. Like any other business, minipreneurs have administration, production, advertising, insurance, travel, networking, public relations, technological support and Web-hosting demands. Although their needs may be scaled down in comparison to larger operations, the need is still present. In order to profit from the minipreneur movement, business owners and service providers around the country need to be asking one question: How can my business help these minipreneurs succeed? By helping them gain profit through facilitating their administration, technological, production and other needs, businesses can benefit from this emerging market. Instead of thinking about how these new businesses can become customers, start thinking about how to market services to help them succeed.

ENTREPRENEURSHIP

Source: Westphal, L. (2006), ‘Marketing to minipreneurs’, NZ Marketing Magazine, 25(1), published by NZ Marketing Magazine, ª 2006 and ‘Who wants to be a minipreneur?’ by Ecubator, published by eCubation, ª 2011, http://ecubation.com/2011/05/who-wants-to-be-a-minipreneur.

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THE CLASSICAL PATHWAY: DISRUPTIVE NEW VENTURE CREATION Next step up as a pathway to entrepreneurship is the classical new business start-up. In Chapter 6 we will look at different types of new venture opportunity models from the perspective of economics. Suffice to say at this point that entrepreneurs disrupt the established market by introducing new products and innovations. In so doing entrepreneurs drive less innovative products out of the market and advance the product frontier or they drive efficiencies in the market by lowering prices, satisfying untapped demand or broadening market penetration. We can see this happening by looking at the novelty (or unfamiliarity) of their products or services relative to the customers’ current experience. We can also see it by looking at the degree of competition faced by the new entrepreneurial business (whether other businesses offer similar products or services). This type of start-up has the distinguishing feature of requiring some form of modest to high capital raising. Actually there are two ways to approach this. The first is an approach whereby a new business start-up creates a unique product or service – one that is not being offered today but would be in great demand if it were. The second way is to adapt something that is currently on the market or extend the offering into an area in which it is not presently available. The first approach is often referred to as new-new, the second as new-old.

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NEW-NEW APPROACH New products or services frequently enter the market. Typical examples include smart phones, MP3 players, plasma televisions and global positioning systems (GPS). All of these products and more have been introduced as a result of research and development (R&D) efforts by major corporations. What we must realise, however, is that unique ideas are not produced only by large companies. Moreover, the rate at which new products enter the market has caused the public to expect many of their household goods to improve continually. How does one discover or invent new products? One of the easiest ways is to make a list of annoying experiences or hazards encountered with various products or services during a given period of time. Common examples include objects that fall out of one’s hand, household chores that are difficult to do and items that are hard to store. These are PITA products, or ‘pain in the arse’ products. Can certain innovations alleviate these problems? This is how some people get ideas for new products. For example, an engineer once observed the mechanism for recording the revolutions of a ship’s propeller. As he watched the device tally the propeller’s revolutions, he realised that the idea could be adapted to the recording of sales transactions – a problem he had been trying to solve for some time. The result led eventually to development of the traditional cash register. Entrepreneurs may arrive at creative ideas through either adaption or innovation. Table 5.2 contrasts the two problem solving approaches of adaptors and innovators.13 One hot area is still Internet social utilities, such as Facebook, MySpace and LinkedIn. From plugins to location-based marketing initiatives to higher bandwidth, there’s change afoot in the world of social media. Facebook was founded by Mark Zuckerberg, a Harvard University student who was frustrated by the lack of networking facilities on campus. The company was founded in February 2004 and now, with 1.35 billion monthly active users (as of 30 September 2014),14 is one of the most

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TABLE 5.2

TWO APPROACHES TO CREATIVE PROBLEM-SOLVING

ADAPTOR

INNOVATOR

Employs a disciplined, precise, methodical approach

Approaches tasks from unusual angles

Is concerned with solving, rather than finding, problems

Discovers problems and avenues of solutions

Attempts to refine current practices

Questions basic assumptions related to current practices

Tends to be means oriented

Has little regard for means; is more interested in ends

Is capable of extended detail work

Has little tolerance for routine work

Is sensitive to group cohesion and cooperation

Has little or no need for consensus; often is insensitive to others

Sources: Michael Kirton, ‘Adaptors and Innovators: A Description and Measure’, Journal of Applied Psychology (October 1976): 623. Copyright ª 1976 by The American Psychological Association.

trafficked websites on the Internet. In mid-2014, Facebook was approaching a market capitalisation of $200 billion.15 The story of the company’s founding at Harvard is so well known as to already be almost mythic. In 2010, the movie The Social Network was released that tells the story of Facebook’s journey from idea to realised venture. In general though, the main sources of new ideas for both men and women are prior jobs, hobbies or interests and personally identified problems. This new-new approach indicates the importance of people’s awareness of their daily lives (work and free time) along with the emergence of new technologies that provide applications to solve problems that provide the basis of new business ideas. In Chapter 6 we will delve more deeply into creativity and where innovative ideas come from.

NEW-OLD APPROACH Most small ventures do not start with a totally unique idea. Instead, an individual piggybacks on someone else’s idea by either improving a product or offering a service in an area in which it is not currently available – hence the term new-old approach. Some of the most common examples are setting up restaurants, clothing stores or similar outlets in sprawling suburban areas that do not have an abundance of these stores. Of course, these kinds of operations can be risky because competitors can move in easily. Potential owners considering this kind of enterprise should try to offer a product or service that is difficult to copy. For example, a computerised billing and accounting service for medical doctors can be successful if the business serves a sufficient number of doctors to cover the cost of computer operators and administrative expenses in order to turn an adequate profit. Or perhaps ideas can be merged into another type of enterprise such as hand car washes or bookshops combined with a cafe´ or gymnasium with child care facilities; this new-old approach seeks out opportunities that have been overlooked by other would-be entrepreneurs. Regardless of whether the business is based on a new-new or a new-old idea, the prospective owner should not rely exclusively on gut feeling or intuition to get started; some degree of analysis is advised that provides evidence that intuition is in tune with customer needs. As we demonstrate in Part Three of this book, proper planning and analysis are integral to any successful venture.

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TECHNOLOGY MEETS SOCIAL ENTERPRISE, BUT NOT FOREVER Across the globe, school computers in the developing world have slow processors and little ENTREPRENEURSHIP storage space, which limits the possibilities for learning computer skills and using the Internet. The students in these classrooms have never dreamt of owning their own PCs and cannot fathom the world on the other side of an Internet connection. IN PRACTICE Yet in many of these places, the speed of the Internet connection is actually fast enough for mainstream computing purposes and children are eager and excited to learn. So some social– technical entrepreneurs created WiHood, a name coming from ‘the World is Your Neighbour’. WiHood offered a virtual personal PC that overcame the physical barriers to digital learning by making clever use of cloud computing and modified USB drives. The WiHood USB bracelet held open source software, plugged into any computer, allowed users to see their very own familiar desktop, and access their files stored in the cloud at WiHood’s servers. The portable, personal device bypassed computing and storage bottlenecks, ensuring the safety of personal documents and giving students familiarity and ownership of their digital learning. In Kenya, WiHood connected the 465 students at Chelelemunk All Girls Boarding School with their own WiHood PC accounts and worked with aid organisations and NGOs with reach into needy areas. As is sometimes the case in social enterprises, the value of the product is hard to pin down – between the software, the pride in owning something, the power of information, the safety of hosting documents online and the fashion statement, it covers a lot of ground. By creating an easy and portable solution for anyone without their own PC, WiHood aimed to enable an easier computing experience, thus facilitating computer use and helping to bridge the digital divide by engaging students in learning. WiHood bracelets were available on Amazon.com, its global distributor. Regrettably, in 2012, the last WiHood bracelet was sold. Since starting the social venture in 2007, the entrepreneur, Thomas F. Anglero, said ‘the world’s first virtual PC on a USB is now just another integrated service that operates invisibly in the back-end of many online services. Such is the nature of innovative ideas, they all have their time and place and some will survive while others serve their purpose and move on, but they all have an impact’. Not at all daunted though, Anglero is a serial social entrepreneur and has now moved onto other ventures. Why not visit his blog and check out his latest thoughts and social ventures. Go to http://anglero.blogspot.com.au. Sources: Adapted from ‘The last WiHood PC bracelet has been sold’ by Thomas F. Anglero, Thomas F. Anglero Blog, ª 2012; ‘WiHood Bracelets Make Computer Education Portable’, Ashoka Technology and Invention Blog, ª 2010.

EXAMINING THE FINANCIAL PICTURE The prospective entrepreneur of a new business start-up must evaluate the enterprise’s financial picture in order to estimate the cost of start-up. How much will it cost to stay in business for the first year? How much revenue will the business generate during this time period? If the outflow of cash is greater than the inflow, how long will it take before the business turns the corner? Answering these questions requires consideration of two kinds of expenses: the start-up capital needed and the monthly expenses. Table 5.3 illustrates a typical worksheet for making the necessary calculations of start-up expenses. Note that this worksheet is based on the assumption that no money will flow in for a number of months (hence Column 3 indicates a multiplication by X for most items). Also, it assumes all start-up costs are totally covered. If the company is in the manufacturing business, however, it will be three to four months in development before any goods are produced for sale, so the factors in Column 3 have to be more generous and the amount of cash needed for startup will be greater. Much of the information needed to fill in this worksheet will need to be gathered and at least partially analysed. Then it can be put into a format that allows the owner to look at the overall financial picture.

Should Mary stay as a comfy employee or strike out on her own in a startup venture? Read about it on CourseMate Express.

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TABLE 5.3

CHECKLIST FOR ESTIMATING START-UP EXPENSES

MONTHLY

EXPENSES

CASH NEEDED TO START THE BUSINESS

WHAT TO PUT IN COLUMN 2

ITEM

ESTIMATE BASED ON SALES OF $__ PER YEAR

(SEE COLUMN 3)

(THESE FIGURES ARE ESTIMATES. THE OWNER/MANAGER MUST DECIDE HOW MANY MONTHS (X) TO ALLOW, DEPENDING ON THE TYPE OF BUSINESS – AS A GUIDE, A SIMPLE SERVICE START-UP SHOULD ALLOW AT LEAST 3 TIMES AND A MORE COMPLEX MANUFACTURING START-UP AT LEAST 6 TIMES AS A BASIS)

COLUMN 1 $

COLUMN 2 $

COLUMN 3 $

Salary of owner/manager

X times Column 1

Other salaries and wages

X times Column 1

Rent

X times Column 1

Advertising

X times Column 1

Delivery expenses

X times Column 1

Supplies

X times Column 1

Telephone

X times Column 1

Other utilities

X times Column 1

Insurance

At least 6 times Column 1*

Taxes, superannuation and other employee on-costs

At least 4 times Column 1*

Interest

X times Column 1

Maintenance

X times Column 1

Legal and professional

X times Column 1

Miscellaneous

X times Column 1

Start-up costs Item

Estimate $

To arrive at estimate

Fixtures and equipment

Determine what is typical for this kind of business: talk to suppliers.

Decorating and remodelling

Talk to a contractor.

Installation of fixtures, equipment

Talk to suppliers.

Starting inventory

Talk to suppliers.

Deposits and public utilities

Talk to utility companies.

Legal and professional fees

Talk to a lawyer, accountant or other professional.

Licences and permits

Contact appropriate local offices.

Advertising and promotion

Decide what will be used; talk to media.

Accounts receivable

Estimate how much will be tied up in receivables by credit customers and for how long.

Cash

Allow for unexpected expenses and losses, special purchases and other expenditures.

Other expenses

List time and estimate costs.

Total cash needed to start

$___________

Add all estimated amounts.

*Consider your local requirements for pre-payment of these expenses Source: Adapted from US Small Business Administration, ‘Management aids’, MA 2.025, Washington DC: US Government Printing Office

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At this point, the entrepreneur should be concerned with what is called upside gain and downside loss. This term refers to the profits the business can make and the losses it can suffer. How much money will the enterprise take in if everything goes well? How much will it gross if operations run as expected? How much will it lose if operations do not work out well? Answers to these questions provide a composite picture of the most optimistic, the most likely and the most pessimistic results. The owner has to keep in mind that the upside gain may be minimal, whereas the downside loss may be great. It is necessary to examine overall gains and losses. This kind of analysis is referred to as risk versus reward analysis (also see ‘Sensitivity analysis’ in Chapter 15) and points out the importance of getting an adequate return on the amount of money risked. This is the just the starting point of a new venture opportunity assessment and a word of caution needs to be heeded. If, through a thorough opportunity analysis (see Chapter 9) and subsequent business plan (covered in Chapter 16), a prospective entrepreneur decides that a new venture is a wise one, it is imperative to remember that the plan may not work perfectly. Some modification may be necessary. Thus, the entrepreneur has to be flexible. If something does not work out, a contingency or backup plan (Plan B) should be available. The worst thing the entrepreneur could do is adopt an allor-nothing strategy.

PERSONAL PREFERENCES Entrepreneurs need to recognise certain personal factors and to limit their choices of ventures accordingly. An entrepreneur’s background, skills, interests and experience are all important factors in selecting the type of business to start and/or buy, as we discuss below. In addition, personal preferences for location and size of a business should guide the selection process. If an entrepreneur always has desired to own a business in the south or west, then that is exactly where the opportunity search should begin.

ACQUIRING AN ESTABLISHED ENTREPRENEURIAL VENTURE Another pathway into entrepreneurship might be purchasing an operating business venture rather than start up an enterprise.16 Purchasing a business venture is a complex transaction and the advice of professionals should always be sought. However, a few basic steps are presented here, including the examination of opportunities, evaluation of the selected venture and key questions to ask. Then there is also a franchising option, which will be covered below.

EXAMINING THE OPPORTUNITIES Entrepreneurs in search of a possible venture to buy need to examine the available opportunities through various sources: • Business brokers: Professionals specialising in business opportunities can often provide leads and assistance in finding a venture for sale. However, the buyer should evaluate the broker’s reputation, services and contacts. The entrepreneur should also remember that the broker usually represents – and gets a commission on the sale from – the seller. • Newspaper ads: ‘Business opportunity’ classified ads are another source. Because an advertisement will often appear in one paper and not another, it may be necessary to check the classified sections of all the papers in the area.

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• Trade sources: Suppliers, distributors, manufacturers, trade publications, trade associations and trade schools may have information about businesses for sale. • Professional sources: Professionals such as management consultants, solicitors and accountants often know of businesses available for purchase.

ADVANTAGES OF ACQUIRING AN ONGOING VENTURE Go to CourseMate Express to see a checklist for analysing a business. Don’t miss anything. Go through every detail.

Of the numerous advantages to buying an ongoing venture, three of the most important are as follows. 1 Because the enterprise is already in operation, its successful future operation, all things being equal, is also likely, although it needs to be clear why the business is for sale. 2 The time and effort associated with starting a new enterprise are eliminated. 3 It sometimes is possible to buy an ongoing business at a bargain price. Each of these three advantages is discussed next.

Less fear about successful future operation A new business faces two great dangers: the possibility that it will not find a market for its goods or services, and the chance that it will not be able to control its costs. If either event occurs, the new business will go into liquidation. Buying an existing concern, however, can alleviate most of these fears. A successful business already has demonstrated the ability to attract customers, control costs and make a profit. Additionally, many of the problems a newly formed business faces are sidestepped. For example: Where should the company be located? How should it advertise? What type of plant or merchandise layout will be the most effective? How much should be reordered every three months? What types of customers will this business attract? What pricing strategy should the company use? Questions such as these have already been asked and answered. Therefore, when a new owner buys an ongoing operation, he or she is often purchasing a known quantity. Of course, it is important to check whether hidden problems exist in the operation. Barring something of this nature, however, the purchase of an existing successful operating venture can be a wise investment.

Reduced time and effort An ongoing enterprise already has assembled the inventory, equipment, personnel and facilities necessary to run it. In many cases, this has taken the owners a long time to do. They have spent countless hours ‘working out the bugs’ so that the business is as efficient as possible. Likewise, they have probably gone through a fair number of employees before getting the right type of personnel. Except for the top management, the personnel usually stay with the sale. Therefore, if the new owners treat the workers fairly, they should not have to worry about hiring, placing and training personnel. In addition, the previous owners undoubtedly have established relations with suppliers, bankers and other businesspeople. These individuals can often be relied on to provide assistance to the new owners. The suppliers know the type of merchandise the business orders and how often it needs to be replenished. They can be a source of advice about managing the operation, as can the bankers with whom the enterprise has been doing business. These individuals know the enterprise’s capital needs and often provide new owners with the same credit line and assistance they gave the previous owners. The same holds true for the accountant, the lawyer and any other professionals who served the business in an advisory capacity. Naturally, the new owners may have their own bankers, accountant or lawyer, but these old relationships are there if the new owners need them.

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A good price Sometimes it is possible to buy an ongoing operating venture at a good price. The owner may want to sell quickly because of a retirement decision or illness. Or the owner may be forced to sell the business to raise money for some emergency that has occurred. Or the owner may seek a greater opportunity in another type of business and therefore be willing to sell at a low price in order to take advantage of the new opportunity. Ideally, when one is looking to buy an ongoing, successful operating venture, one of these three advantages (especially the last one) is present. However, it is seldom that a person sells a successful venture at an extraordinarily low price. The owner of a successful small venture built the enterprise through skilful business practices, knows how to deal with people and has a good idea of the operation’s fair market value. That person will rarely sell for much below the fair market value. Therefore, the prospective owner must avoid bidding high on a poor investment or walking away from a good bargain because ‘it smells fishy’. The way to prevent making the wrong decision is to evaluate the existing operation in a logical manner.

KEY QUESTIONS TO ASK As US President Ronald Reagan once said about the Soviet President’s weapons proposals: ‘Trust, but verify’. It is worth remembering! It is all a bit emotional selling the business that one has nurtured from birth or buying someone else’s ‘baby’. But the entrepreneur needs to look under the covers to see the intimate details. It is a bit like a prenuptial agreement and in business terms it is called due diligence. When deciding whether to buy, the astute prospective owner needs to ask and answer a series of ‘right questions’.17 The following section discusses questions and provides insights into the types of actions to take for each response.

Why is the business being sold? One of the first questions that should be asked is why the owner is selling the business.18 Quite often, a difference exists between the reason given to prospective buyers and the real reason. Typical responses include ‘I’m thinking about retiring’, ‘I’ve proven to myself that I can be successful in this line of business, so now I’m moving to another operation that will provide me with new challenges’, or something like ‘I want to move to the Gold Coast of Australia and go into business with my brother-in-law there’. Any of these statements may be accurate, and – if they can be substantiated – the buyer may find that the business is indeed worth purchasing. However, because it is difficult to substantiate this sort of personal information, the next best thing is to check around and gather business-related information. Is the owner in trouble with the suppliers? Is the lease on the building due for renewal and the landlord planning to triple the rent? Worse yet, is the building about to be torn down? Other site-location problems may relate to competition in the nearby area or zoning changes. Is a new shopping mall about to be built nearby that will take much of the business away from this location? Has the local council passed a new regulation that calls for the closing of businesses on Sunday, the day of the week when this store does 25 per cent of its business? Financially, what is the owner going to do after selling the business? Is the seller planning to stay in town? What employment opportunities does he or she have? The reason for asking these questions is that the new owner’s worst nightmare is to find that the previous owner has set up a similar business a block away and is drawing back all of the customers. One way to prevent this from

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happening is to have a lawyer write into the contract an agreement that the previous owner will refrain from conducting the same business within a reasonable distance for a period of at least five years. This is known as a legal restraint of trade – an agreement not to compete or ‘noncompete clause’. Doing this helps the new owner retain the business’s customers.

What is the current physical condition of the business? Even if the asking price for the operation appears to be fair, it is necessary to examine the physical condition of the assets. Does the company own the building? If it does, how much repair work needs to be done? If the building is leased, does the lease provide for the kinds of repairs that will enhance the successful operation of the business? For example, if a flower shop has a large refrigerator for keeping flowers cool, who has to pay to expand the size of the refrigerator? If the landlord agrees to do so and to recover the investment through an increase in the lease price, the total cost of the additional refrigerated space must be compared to the expected increase in business. Meanwhile, if the landlord does not want to make this type of investment, the new owners must realise that any permanent additions to the property remain with the property. This means that if something simply cannot be carried out of the building, it stays. Pictures on the walls, chairs and desks the previous business owner purchased can be removed. However, new bookshelves nailed to the wall, carpeting attached to the floor, a new acoustic ceiling installed to cut down on noise in the shop and the new refrigerated area all become permanent property of the building owner. Therefore, the overriding question while examining the physical facilities is, ‘How much will it cost to get things in order?’

What is the condition of the inventory? How much inventory does the current owner show on the books? Does a physical check show that inventory actually exists? Additionally, is inventory saleable, or is it out-of-date or badly deteriorated?

What is the state of the company’s other assets? Most operating ventures have assets in addition to the physical facilities and the inventory. A machine shop, for example, may have various types of presses and other machinery. An office may have computers, copiers and other technology that belong to the business. The question to ask about all of this equipment is, ‘Is it still useful, or has it been replaced by more modern technology?’ In short, are these assets obsolete? Another often overlooked asset is the company’s records. If the business has kept careful records it may be possible to determine who is a good credit risk and who is not. Additionally, these records make it easy for a new owner to decide how much credit to extend to the prior customers. Likewise, sales records can be very important because they show seasonal demand and peak periods. This can provide the new owner with information for inventory control purposes and can greatly reduce the risks of over- or under-stocking. Still another commonly overlooked asset is past contracts. What type of lease does the current owner have on the building? If the lease was signed three years ago and is a seven-year lease with a fixed rent it may have been high when it came into effect but could be on the low side for comparable facilities today. Furthermore, over the next four years the rent should prove to be quite low considering what competitors will be paying. Of course, if the lease is about to expire it is a different story. Then the prospective owner has to talk to the landlord to find out what the terms of the lease will be. Additionally, a prospective owner’s lawyer should look at the old lease to determine if it can be passed on to a new owner and, regardless of the rent, how difficult it is to break the lease if the business should start to fail.

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Finally, the prospective buyer must look at an intangible asset called goodwill. Goodwill is often defined as the value of the company beyond what is shown on the books. For example, if a software company has a reputation for quick and accurate service, the company has built up goodwill among its customers. If the owners were to sell the business, the buyer would have to pay not only for the physical assets in the software company (office furniture, computers, etc.) but also for the goodwill the firm has accumulated over the years. The reputation of the business has a value.19

How many of the employees will remain? It is often difficult to give customers the good service they have come to expect if seasoned employees decide they do not want to remain with the new owner. The owner is certainly an important asset of the company, but so are the employees; they play a role in making the business a success. Therefore, one question the prospective buyer must ask is, ‘If some people will be leaving, will enough be left to maintain the type of service the customer is used to getting?’ In particular, the new owner must be concerned about key people who are not staying. Key employees are part of the value of the business. If it is evident that these people will not be staying the prospective buyer must subtract something from the purchase price by making some allowance for the decline in sales and the accompanying expense associated with replacing key personnel. When purchasing an existing business, the prospective owner should conduct an assessment of the current group of employees. He or she should review existing performance evaluations and talk with the current owners about the quality of each employee and his or her value to the business. It may be easier to retain valuable employees by seeking them out before the purchase to ensure their feelings of security. The incoming owner should interview all of the current employees and make decisions about who to keep and who to let go before actually taking over the enterprise.

What type of competition does the business face? No matter what goods or service the business provides, the number of people who will want it and the total amount of money they will spend for it is limited. Therefore, the greater the competition the less the company’s chance of earning large profits. As the number of competitors increase, the cost of competing will usually go up. More money must be spent on advertising. Price competition must be met with accompanying reductions in overall revenue. Simply too many companies are pursuing the same market. Additionally, the quality of competition must be considered. If nine competitors exist, a new owner could estimate a market share of 10 per cent. However, some of these competitors undoubtedly will be more effective than others. One or two may have very good advertising and know how to use it to capture 25 per cent of the market. A few others may offer outstanding service and use this advantage to capture 20 per cent of the market. Meanwhile, the remaining six fight for what is left. Then the location of the competition must be considered. In many instances, a new venture does not offer anything unique so people buy on the basis of convenience. A service located on the corner may get most of the business of local residents. One located across town will get virtually none. Because the product is the same at each location no one is going to drive across town for it. This analogy holds true for groceries, pharmaceuticals and hardware. If competitors are located near one another, each will take some of the business the others could have expected, but none is going to maximise its income. However, if the merchandise is an item that people shop for very carefully – furniture, for example – a competitor in the immediate area can be a distinct advantage. For example, two furniture stores located near each other tend to draw a greater number of customers than they

172 Part 2: Initiating entrepreneurial ventures

would if located 10 blocks apart. When people shop for furniture they go where a large selection is available. With adjacent stores customers will reason that if the furniture they are looking for is not in one it might be in the other. Additionally, since they can step from one store to the next, they can easily compare prices and sale terms. Finally, any analysis of competition should look for unscrupulous practices. How cutthroat are the competitors? If they are very cutthroat the prospective buyer will have to be continually alert for practices such as price fixing and kickbacks to suppliers for special services. Usually, if the company has been around for a couple of years it has been successful in dealing with these types of practices. However, if some competitors are getting bad reputations the new owner will want to know this. After all, over time the customers are likely to form a stereotyped impression of enterprises in a given geographic area and will simply refuse to do business with any of them (‘It is no use looking for clothing in that area’, for example). In this case, the customers retaliate against unethical business practices by boycotting the entire area in which these businesses are located. In short, an unethical business competitor can drag down other companies as well.

What does the company’s financial picture look like? It may be necessary for a prospective buyer to hire an accountant to look over the company’s books. It is important to get an idea of how well the business is doing financially. One of the primary areas of interest should be the company’s profitability.20 Is the business doing anything wrong that can be spotted from the statements? If so, can the prospective buyer eliminate these problems? Individuals who are skilled in buying companies that are in trouble, straightening them out and reselling them at a profit know what to look for when examining the books. So get good accountants (or learn it oneself). But also know that the seller’s books alone should not be taken as proof of sales or profits. One should insist on seeing records of bank deposits for the past two to three years. If the current owner has held the company for only a short time, the records of the previous owner also should be examined. In fact, it is not out of line to ask for the owner’s income tax return, although national privacy laws may prevent this. The astute buyer knows that the firm’s records reflect its condition. Another area of interest is the company’s profit trend. Is it making more money year after year? More important, are profits going up as fast as sales, or is more and more revenue necessary to attain the same profit? If the latter is true, this means the business may have to increase sales 5 to 10 per cent annually to net as much as it did the previous year. This spells trouble and is often a sign that the owner is selling because ‘there are easier ways to make a living’. Finally, even if the company is making money, the prospective buyer should compare the company’s performance to that of similar companies. For example, if a small retail shop is making a 22 per cent return in investment this year in contrast to 16 per cent two years ago, is this good or bad? It certainly appears to be good, but what if competing stores are making a 32 per cent return on investment? Given this information, the company is not doing as well. One way to compare a company to the competition is to obtain comparative information on retail and wholesale companies in various fields that provide businesspeople with an overall view of many key financial ratios. For example, one of the most important financial ratios is the comparison of current assets (cash, or items that can be turned into cash in the short run) to current liabilities (debts that will come due in the short run). This key ratio reflects a business’s ability to meet its current obligations. A second key ratio is the comparison of net profits to net sales (net profit margin). How much profit is the owner making for every dollar in sales? A third key ratio is net profit to net

Chapter 5: Pathways to entrepreneurial ventures 173

worth (return on net worth). How much profit is the individual making for every dollar invested in the company? (For more detail, see ‘Financial ratio analysis’ in Chapter 15.) The scope of this chapter rules out a detailed treatment of valuation methodologies. There are some rules of thumb in every industry that make the initial winnowing a bit easier. But beware. It is vital to be very cautious when using rules of thumb as they are based on averages and often don’t accurately reflect individual situations. Rules of thumb should only be used to support other methods of valuation; that is, to externally verify what the valuation specialist has arrived at. Despite the caveat, here’s the most venerable rule of thumb (ROT): the earnings multiplier. This makes you focus on your immediate desire to make money. Don’t be confused by real estate earnings multiples. When you buy a rental property, you normally want a 10 per cent return per year on your investment (that is, pay off the property in 10 years). Share market prices are often as much as 20 times earnings. Running a small private business is much riskier and tougher and therefore the return on investment is shorter. So you should be looking at recouping your purchase/investment in three to five years, which is equivalent to a projected annual return on investment between 20 and 33 per cent. Now, isn’t that the type of return on investment (ROI) that would make you take the leap? The real problem is which earnings figure to use. This year’s? A three-year average? The most usual may be projected earnings. You’ll be satisfied by that figure only ‘by feel’. Let your common sense prevail. It’s tricky, but remember: the seller created the market but you can recreate it. In the end, valuation of start-up companies is highly subjective. How much is this new business ultimately worth? Is the asking price reasonable? This is never an exact science and different people have different rules of thumb and methods. It might be useful to hire an independent business valuer in the same way that one would have a property valuation or a building assessment done when buying a new house. Each method has some value and one should use a number of methods to arrive at a range of prices which you can use to set an asking price or use in negotiating if you are buying.

NEGOTIATING THE DEAL The potential buyer must negotiate the final deal.21 This negotiation process, however, involves a number of factors. Four critical elements should be recognised: information, time, pressure and alternatives. Information may be the most critical element during negotiations. The performance of the company, the nature of its competition, the condition of the market and clear answers to all of the key questions presented earlier are all vital components in the determination of the business’s real potential. Without reliable information the buyer is at a costly disadvantage. The seller should never be relied on as the sole information source. Although the seller may not falsify any information, he or she is likely to make available only the information that presents the business in the most favourable light. Therefore, the buyer should develop as many sources as possible. The rule should be to investigate every possible source. Time is also a critical element. If the seller has already purchased another business and a potential buyer is the only prospect to buy the existing company then that buyer has the power to win some important concessions from the seller. If, however, the owner has no such deadline but simply is headed to retirement, or if the buyer’s financial sources wish to invest in the project quickly, then the buyer is at a serious disadvantage. In short, having more time than the other party can be very beneficial. In Figure 5.1 a due diligence checklist provides an outline of key areas that need close attention prior to purchasing any pre-loved business.

How to do due diligence? Go to CourseMate Express to learn about the key steps when you are considering an acquisition.

174 Part 2: Initiating entrepreneurial ventures

FIGURE 5.1 DUE DILIGENCE CHECKLIST

Rate each of the following using a scale of 1–10 (1 ¼ lowest; 10 ¼ highest) Management team 1

Previous experience (include bios)

2

Management team strengths

3

Functional areas of strength and weakness (marketing, development, finance, sales, etc.)

4

Identified key functional areas that require immediate additions/changes

Rating

Overall rating: Targeted industry segment 1

Addressable market size

2

Current competition and respective positioning

3

Possible new entrants to the market

4

Significant competitive advantage and/or differentiation

5

Market and adoption related risks

Rating

Overall rating: Technology and products 1

Patents pending

2

Architecture

3

Standards supported

4

Performance/scalability metrics

5

Current adoption level of technology

6

Review of development methodology and selected tools

7

Twelve-month product strategy, feature prioritisation and roadmap

8

Technology risks (techniques/processes, tools, hiring/people, etc.)

Rating

Overall rating: Marketing plan 1

Addressable market size

2

Percentage of market capture

Rating

Overall rating: Financials

Rating

1

Income statement (for three years)

2

Sources and use document

3

Industry comparables

4

Valuation

5

Capitalisation table

6

Exit strategy Overall rating: Source: ‘Due diligence worksheet: Evaluating a start-up company for venture investing’ by Vadim Kotelnikov. Copyright ª Vadim Kotelnikov. Used by permission. http://www.1000ventures.com/venture_financing/due_diligence_worksheet_byindiaco.html

Chapter 5: Pathways to entrepreneurial ventures 175

FRANCHISING ONE’S WAY INTO ENTREPRENEURSHIP Another pathway that incorporates some of the independence of an entrepreneur with the larger umbrella of a corporation is the franchise. Therefore, it is a hybrid form of entering business for oneself. Today, more than a third of all retail sales and an increasing part of the gross domestic product (GDP) are generated by private franchises. A franchise is any arrangement in which the owner of a trademark, trade name or copyright has licensed others to use it in selling goods or services. A franchisee (a purchaser of a franchise) is generally legally independent, but economically dependent on the integrated business system of the franchisor (the seller of the franchise). In other words, a franchisee can operate as an independent businessperson, but still realise the advantages of a regional or national organisation.22

To franchise or not to franchise? That is the question . . . for young entrepreneurs. Learn what it takes on CourseMate Express.

HOW A FRANCHISE WORKS Business franchise systems for goods and services generally work the same way. The franchisee, an independent businessperson, contracts for a complete business package. This usually requires the individual to do one or more of the following: • Make a financial investment in the operation. • Obtain and maintain a standardised inventory and/or equipment package, usually purchased from the franchisor. • Maintain a specified quality of performance. • Pay a franchise fee as well as a percentage of the gross revenues. • Engage in a continuing business relationship. In turn, the franchisor provides the following types of benefits and assistance: • The company name. For example, if someone bought a Burger King franchise, this would provide the business with drawing power. A well-known name, such as Burger King, ensures higher sales than an unknown name, such as Ralph’s Big Burgers. • Identifying symbols, logos, designs and facilities. For example, all McDonald’s units have the same identifying golden arches on the premises. Likewise, the facilities are similar inside. • Professional management training for each independent unit’s staff. • Sale of specific merchandise necessary for the unit’s operation at wholesale prices. All of the equipment to run the operation and the food or materials needed for the final product is usually provided. • Financial assistance, if needed, to help the unit in any way possible. • Continuing aid and guidance to ensure that everything is done in accordance with the contract.23

GROWING ASIAN FRANCHISE OPPORTUNITIES Let’s look at franchising in Asia. In China, 10 per cent of the 4000 franchises are from overseas, the same as in Japan. In terms of the number of franchises and outlets, the two markets are very comparable. India has about 1800 franchises, of which only 1 per cent are foreign. South Korea, by contrast, has some 30 per cent of its 409 000 franchised operations owned by overseas brands. In the ASEAN countries as a whole, the top three franchise nations are the Philippines (with 1000 franchises), Indonesia (with 810) and Singapore (with 500). The overall picture is of an Asian region in which franchise models are set to catch on with growing demand for global brands, better distribution and more mature business practices.

ENTREPRENEURSHIP IN PRACTICE

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Many companies are looking towards emerging markets such as China, India and South-East Asia. But there are uncertainties. In Singapore, while some unusual concepts have appeared, the two most common franchises are food and beverage at 60 per cent and education at 20 per cent of the franchising pie. Of course it’s country specific. For an ageing population like Japan, senior care services will do better than in Vietnam. In India, a rapidly increasing middle class sees fashion and fast food becoming more popular. Some concepts do well even in a recession, such as hair cutting, tax preparation, accounting, shipping and packaging, pet care, home and car repairs and human resources. Green concepts, such as solar energy, recycling and green building materials are becoming popular, as are healthy living businesses, such as smoothies, health foods, health spas and personal care. Source: Adapted from Hong Kong Trade Development Council, http://www.hktdc.com.

ADVANTAGES OF FRANCHISING Training and guidance Perhaps the greatest advantage of buying a franchise, as compared to starting a new business or buying an existing one, is that the franchisor will usually provide both training and guidance to the franchisee. As a result, the likelihood of success is much greater for national franchisees who have received this assistance than for small-business owners in general. For example, it has been reported that the ratio of failure for small enterprises in general to franchised businesses may be as high as four or five to one.

Brand-name appeal An individual who buys a well-known national franchise, especially a big-name one, has a good chance to succeed. The franchisor’s name is a drawcard for the establishment. People are often more aware of the product or service offered by a national franchise and prefer it to those offered by lesserknown outlets.

A proven track record Another benefit of buying a franchise is that the franchisor has already proved the operation can be successful. Of course, if someone is the first individual to buy a franchise, this is not the case. However, if the organisation has been around for five to 10 years and has 50 or more units it should not be difficult to see how successful the operations have been. If all of the units are still in operation and the owners report they are doing well financially, one can be certain the franchisor has proved that the layout and location of the store, the pricing policy, the quality of the goods or service and the overall management system are successful.

Financial assistance Another reason a franchise can be a good investment is that the franchisor may be able to help the new owner secure the financial assistance needed to run the operation. In fact, some franchisors have personally helped the franchisee get started by lending money and not requiring any repayment until the operation is running smoothly. In short, buying a franchise is often an ideal way to ensure assistance from the financial community.

DISADVANTAGES OF FRANCHISING The prospective franchisee must weigh the advantages of franchising against the accompanying disadvantages.

Chapter 5: Pathways to entrepreneurial ventures 177

Franchise fees In business, no one gets something for nothing. The larger and more successful the franchisor, the greater the franchise fee. For a franchise from a national chain it is not uncommon to be faced with a fee of somewhere between $5000 to $100 000. Smaller franchisors or those who have not had great success charge less. Nevertheless, entrepreneurs deciding whether or not to take the franchise route into business should weigh the fee against the return they could get putting the money into another type of business. Also, remember that this fee covers only the benefits discussed in the previous section. The prospective franchisee also must pay for building the franchise unit and stocking it, although the franchisor may provide assistance in securing a bank loan. Additionally, a fee is usually tied to gross sales. Typically, the franchise buyer pays an initial franchise fee, spends their own money to build a store, buy the equipment and inventory and then pays a continuing royalty based on sales, usually between 5 and 12 per cent. Most franchisors require buyers to have 25 to 50 per cent of the initial costs in cash. The rest can be borrowed, in some cases from the franchising organisation itself.

THE COFFEE CLUB – COFFEE GOES CLUBBY You can almost picture it. Two couples searching in vain for an affordable, but stylish place to ENTREPRENEURIAL have coffee after dinner. ‘Frankly, we were amazed that it just couldn’t be found in a city the size of Brisbane. The more Emmanuel Drivas and I thought about it, the more we felt that there was an opportunity EDGE here,’ says Emmanuel Kokoris. By the end of that year, 1989, Kokoris and Drivas had made sure they wouldn’t be caught out again. They opened The Coffee Club at Eagle Street Pier in Brisbane’s CBD. Response was immediate, and several Coffee Clubs followed in quick succession with the same mix of style, innovation and value-for-money which had previously been missing in the market. In fact, one of the original Coffee Club cafes may have actually set the tone for the now trendy suburb of West End, where The Coffee Club head office is located. ‘I had grown up in this area, and let me tell you, it wasn’t trendy then. I told my best friend, who had been raised only a few blocks away, that we were intending to open a Coffee Club here, and he had a good laugh,’ says Kokoris. ‘We were the first in here, but today West End actually has a very popular cafe strip, with interesting shops and lots of ‘‘beautiful people’’ enjoying the atmosphere.’ From one outlet, the original Coffee Club concept has now expanded to include a very successful and popular franchise operation. There are now over 340 stores across Australia, New Zealand, Thailand, New Caledonia and China, serving more than 40 million cups of coffee every year and employing more than 6000 staff. This story is in some ways typical of new business start-ups – a need is identified and the solution is found. What is unusual is that Kokoris recognised the significance of the registered trademark quite early on in the business’s evolution and transition to network, and then franchise operation. ‘We knew we had something so different that it needed as much protection as possible from imitation. We were also developing a brand, not only for the actual cafes, but for the range of products we saw resulting from the cafe’s popularity,’ says Kokoris. ‘We met with a local trademark attorney here in Brisbane, and got excellent advice on how to protect what we consider to be one of our most significant assets. Our registered trademark protects our trade name and provides us with a consistent image to the marketplace. It’s all about consumer recognition,’ says Kokoris. The Coffee Club trademark is registered with IP Australia across a variety of classes. Strategic registration in more than a dozen countries provides protection for what is now also a global market. Their registered mark is used extensively, from cafe signage, uniforms, bomber jackets, name tags, crockery, matches and serviettes, to the packaging for their own special blend of coffee beans and ground coffee packs.

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Kokoris sums it up perfectly, ‘Sure, we have had to learn about areas of business that perhaps we weren’t experts on before 1989. Intellectual property – our trademarks, copyrighted menus, brochures and so on – all of this is just as important to us as any other business issue. Maybe more so because this is what makes us distinctive, different from the rest.’ Source: Adapted from ‘Innovated’, http://www.innovated.gov.au; and updated from Coffee Club, http://www.coffeeclub.com.au/ good-food-great-service-excellent-coffee. Data from IP Australia, Commonwealth of Australia and Coffee Club.

Franchisor control When one works in a large corporation, the company controls the employee’s activities. If an individual has a personal business, they control their own activities. A franchise operator is somewhere between these extremes. The franchisor generally exercises a fair amount of control over the operation in order to achieve a degree of uniformity. If entrepreneurs do not follow franchisor directions they may not have their franchise licence renewed when the contract expires.

Unfulfilled promises In some cases, especially among less-known franchisors, the franchisees have not received all they were promised.24 For example, many franchisees have found themselves with trade names that have no drawing power. In addition, many franchisees have found that the promised assistance from the franchisor has not been forthcoming. For example, instead of being able to purchase supplies more cheaply through the franchisor, many operators have found themselves paying exorbitant prices for supplies. If franchisees complain they risk having their agreement with the franchisor terminated or not renewed.

FRANCHISE LAW

On CourseMate Express read about elements of the franchise disclosure statement. Would the US requirements work in your country?

Franchise differs radically between countries. New Zealand is the ‘most franchised country in the world’.25 It is the Wild, Wild West in franchising. There is no specific legislation, as the sale of businesses and business practices is covered by normal commercial law such as the Fair Trading Act, Health & Safety in Employment Act, Consumer Guarantees Act and the Employment Act. But this can go horribly awry. In 2007, about 200 victims, mainly Chinese and Indian immigrants, paid between $21 000 and $25 000 for nonexistent ironing businesses and received no compensation.26 The selfregulatory Code of Practice, introduced in 1996 by the Franchise Association of New Zealand, was reviewed in 2009, and the New Zealand government again said no to franchising regulation.27 Australia is a different environment. The franchise market is very active and volatile. Both Starbucks and Krispy Kreme have closed down dozens of stores because they could not adapt to Australia’s highly regulated environment. The Australian Franchising Code of Conduct was updated in 2015 to focus on greater information sharing and transparency with both sides of a franchise arrangement having an enforceable obligation to act in good faith. Franchisors are required to disclose specific facts to franchisees and to follow set procedures in their dealings with franchisees. If a dispute arises, either party can require the other to attend mediation. Potential franchisees must sign a statement that they have been given independent advice or that they were told to seek such advice and chose not to do so. The Code’s disclosure obligations require franchisors to supply prospective franchisees, or those seeking to renew or extend an existing franchise, with a specifically prescribed disclosure document and a copy of the Code. Excluded from the Code are foreign franchisors with only one franchise operating within Australia. The Australian Competition and

Chapter 5: Pathways to entrepreneurial ventures 179

Consumer Commission (ACCC) administers the Code and enforces it through sanctions and oversight of a new penalty regime that includes infringement notices of up to $8500 for companies that breach the code and $1700 for individuals. Disputes are dealt with by a mediation adviser. The Australian Government-funded Office of the Franchise Mediation Adviser (OFMA) assists franchisors and franchisees to resolve their problems and disputes through mediation, which is often a less costly option than going to court.

GREEN FRANCHISE OPPORTUNITIES Entrepreneurs who want to align their business to environmental practice are increasingly looking at green franchises. Throughout the Internet there are a variety of ideas for sale. Here are a few: • sustainable home energy systems • carbon neutral dry cleaning • ecological car cleaning and detailing services • pizza franchisees with only organic ingredients that use hybrid cars for delivery • auto tune-ups with an eco-friendly inspection, synthetic oil, lifetime oil and air filters, platinum spark plugs and more • rubbish removal companies that completely recycle the waste • organic lawn care franchises using environmentally safe products • solar franchises with consultants, designers and installers • carpet cleaning with safe chemical-free methods • energy doctors with products designed to reduce heating and cooling costs and make homes more energy efficient • printer cartridge recycling that is cheaper and just as good as new.

SOCIAL VENTURING AS A PATHWAY TO ENTREPRENEURSHIP As former US presidential candidate Hubert H. Humphrey once said, ‘Profit and morality are a hard combination to beat’.28 That is why the sixth pathway discussed in this chapter is social venturing, and it can be combined with all of the above. For the entrepreneur driven by a desire to find solutions to social injustice or environmental problems, there is definitely money available. Private foundations and private individuals are giving early funding for promising social business plans. Many funders and private investors are looking for enterprises that fulfil grander missions in ways that are self-sustaining. Structuring a social enterprise is even more challenging than regular business ventures. Social entrepreneurs face a double challenge: they have to find an effective strategy for accomplishing lasting social change and they must find a viable profit-making business model to support that strategy. Social entrepreneurs need to ‘run the numbers’ as critically as they would with business ventures. Social venturing marries the best of entrepreneurial innovation with cutting-edge strategies that lead to a more sustainable and/or equitable planet. Entrepreneurs need to apply business skills to solve real-world challenges and capture opportunities in new market niches. Whether independent entrepreneurs or social intrapreneurs working within a corporation, entrepreneurs are always pushing the envelope to create new approaches and design new products to solve some of the world’s most pressing problems. A social venture, also called a social enterprise, is any non-profit enterprise, social-purpose business or revenue-generating venture, business-development service, micro-finance institution or

180 Part 2: Initiating entrepreneurial ventures

cooperative that uses rigorous business models and is founded to support or create economic opportunities for a particular target population, while simultaneously operating with reference to the financial bottom line.29 The popularity of social entrepreneurship (see Chapter 4) has increased the number of social ventures. What has resulted is the realisation that there are several kinds of potential business models for different kinds of social ventures. It is important to consider which business model would be appropriate for each project, and to understand the legal models that might influence particular models. Popular models are: licensing, start-up with seed funding and grants, incubation, partnering with a forprofit company and franchising. Bhowmick has defined social enterprise as a venture aimed at ‘social change or a new, more just, social equilibrium, not maximising financial surpluses or profit for managers or investors’.30 Viability is critical to success and social ventures use the same models of pricing, marketing, production planning and financial tools as regular businesses. Social ventures are market-driven in the sense that they absolutely need to know who their customers are and to respond to their wants and desires. Social ventures use market research techniques (see Chapter 10) so that they make sure their enterprise can have healthy performance. Unlike some for-profit businesses that believe in the build-it-and-they-will-come approach, social ventures must be developed with attention to the exact benefits the customers seek. Figure 5.2 has all the concepts of a regular business but they must be focused to social goals. Social venturing does not use any new methods or tools to achieve its ends. The newness, if anything, is the emphasis on achieving the double bottom line – social and business objectives – inherent in social enterprises or the triple bottom line (see Chapter 15).31

MODELS OF SOCIAL ENTERPRISES According to Alter, there are three social enterprise models that are configured to simultaneously serve their clients and survive in the market. Some sell products or services directly to their target population: in this case the market and the client are the same (Figure 5.3, model 1). This is the model typically used for a financial service or micro-finance program whereby enterprise viability is achieved through the sale of sufficient volume of services, and social impact is achieved via providing poor entrepreneurs with access to affordable credit to fuel their businesses. Other social enterprises act as intermediaries, buying goods produced by poor or disadvantaged entrepreneurs, and then selling these products in external markets (Figure 5.3, model 2). Marketing enterprises or economic development programs use this approach, realising income through a mark-up on products to final customers and achieving social impact by helping the disadvantaged self-employed access markets for their products. A third possibility is a social enterprise that employs its target population and sells products or services on the open market (Figure 5.3, model 3). This type of social enterprise is viable in much the same way as a private business; social impact is accomplished by employing a target population that may otherwise be barred from work opportunities. Non-profit organisations may earn income from a range of activities, including providing healthcare and educational programs, operating retail stores, performing plays and concerts and offering training workshops and consulting services. The percentage of total income that a non-profit generates from these activities is closely tied to the field of service in which it operates. According to data from tax returns filed by non-profit organisations, healthcare non-profits may receive 85 per cent of their income from fees for services, while environmental, animal and international service organisations are likely to receive less than 25 per cent from earned income.

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FIGURE 5.2

THE SOCIAL ENTERPRISE DEVELOPMENT CYCLE

EXIT

2. ENTERPRISE IDEA GENERATION

1. ORGANISATIONAL READINESS 3. MARKET RESEARCH

10. EXIT 4. FEASIBILITY

9. EVALUATION 5. REJECT NON-VIABLE IDEAS 8. BUSINESS DEVELOPMENT GROWTH AND DIVERSIFICATION 7. PREPARE BUSINESS PLAN

6. DEVELOP VIABLE BUSINESS MODEL

Source: Adapted from Managing the double bottom line: A business planning reference guide for social enterprises, by Sutia Kim Alter. Copyright ª 2000 Sutia Kim Alter. Published by Virtue Ventures LLC.

182 Part 2: Initiating entrepreneurial ventures

FIGURE 5.3 SOCIAL ENTERPRISE MODELS

SOCIAL ENTERPRISE MODELS MODEL 1: ENTREPRENEUR MODEL SE MARKET

TARGET POPULATION

SE

CUSTOMER

VIABILITY SOCIAL IMPACT Social enterprise sells needed business products and services directly to its target population – self-employed poor or disadvantaged populations – to improve their business income. This is a classical model of Business Development and Microfinance Programs.

MODEL 2: MARKET INTERMEDIARY MODEL SE MARKET

TARGET POPULATION

CUSTOMER

SE

SOCIAL IMPACT

VIABILITY

Social enterprise acts as an intermediary between the target population and the market; it achieves viability through the sale of client-made products to the final customer and helps clients reach markets otherwise inaccessible to them.

MODEL 3: EMPLOYMENT MODEL PRODUCER

SE MARKET

SE TARGET POPULATION

CUSTOMER

SOCIAL IMPACT AND VIABILITY This social enterprise is a direct employer of its target population, (disadvantaged, atrisk individuals); it attains viability through the sales of its products and services to an external market. Source: Managing the double bottom line: A business planning reference guide for social enterprises, by Sutia Kim Alter. Copyright ª 2000 Sutia Kim Alter. Published by Virtue Ventures LLC.

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SUMMARY The chapter has explored six pathways to gaining entrepreneurial experience. Three more specific and common pathways will be elaborated over the next three chapters. This chapter started with one of the most common pathways known as bootstrapping, also sometimes defined as simply starting a new business without financing. We also looked at the exciting new area of minipreneurship which has been made possible by advances in technology and online communication which requires minimal funding. Also included was a discussion on business development assistance. The chapter then went on to describe a conventional business start-up that raises capital to launch a unique product or service. Sometimes this involves what is called a new-new approach – that is, the development of an entirely new idea for a product or service (as was the case with MySpace and Google). In most instances, however, the prospective owner/manager must be content to use a new-old approach by piggybacking on someone else’s ideas. This involves either expanding on what the competition is doing or offering a product or service in an area in which it is not presently available. On the financial side, the prospective owner/manager needs to examine the enterprise’s financial picture and determine the costs of setting up the operation and the amount of revenue that will be generated during the initial period. The prospective owner/manager must review a series of other operational considerations ranging from the building, merchandise and equipment needed for operations to record keeping, insurance, legal, marketing and personal matters. Another opportunity is the purchase of an existing successful business, which has a number of advantages. Three of the most important are that its successful future operation is potentially more likely, the time and effort associated with starting a new enterprise are eliminated and a bargain price may be possible. Before deciding whether to buy, however, the prospective owner needs to ask and answer a series of probing questions. These include: Why is the business being sold? What is the physical condition of the business? What is the condition of the inventory? What is the state of the company’s other assets? How many of the employees will remain? What competition does the business face? What is the company’s financial picture? After all questions have been answered satisfactorily, the prospective buyer must negotiate for the business. In the final analysis, however, the prospective owner should be concerned with buying the company’s assets at market value then paying something for goodwill if it is deemed an asset. The chapter then moved to franchising. A franchise can be a number of common legal structures and is often associated with entrepreneurs who wish to launch their careers to self-employment. We discussed the advantages and disadvantages as well as the legal aspects. Finally, we examined the very interesting area of social venturing. Social ventures use similar planning tools to regular business ventures, but at each step there are different considerations and nuances. We looked at the models of social venturing and discussed the steps that a social entrepreneur would go through to create a social venture.

KEY TERMS AND CONCEPTS bootstrapping cash flow double bottom line due diligence financial ratios franchise franchise fee franchisee franchisor goodwill legal restraint of trade

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Long Tail net profit margin new business start-up new-new approach new-old approach non-compete clause PITA products profit trend profitability risk versus reward social enterprise

Review key terms with interactive flashcards

social venturing unscrupulous practices upside gain and downside loss

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REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Not all entrepreneurs start just with an idea and little else. Name three other pathways into entrepreneurship and describe the advantages of each. What are some examples of bootstrapping that you could use in your business idea? What has given rise to minipreneurs and what kinds of businesses are they engaged in? How does the new-new approach to starting a new venture differ from bootstrapping? Provide examples for your answer. How does a new-old approach differ from the new-new pathway to starting a new venture and what are the advantages of the new-old approach? How can an individual who is thinking of going into business evaluate the financial picture of the enterprise? Use the methodology of Table 5.3 to prepare your answer. Explain why just the financial history is not sufficient in making a purchase decision for an operational business. Explain at least four other forms of investigation one should make. What are the advantages of buying an ongoing business? Explain them. What probing questions should you ask of a business owner when deciding whether to buy a business? What are the types of assets of a company you should examine when considering purchasing a business and what should you look for? What is meant by the term ‘franchise’? In a franchising agreement, what is the franchisee often called on to do? What responsibility does the franchisor assume? Explain why a would-be entrepreneur would explore the option of buying into a franchise. Cite and explain at least three advantages. Explain the merits and pitfalls of purchasing a franchise brand. How can a prospective franchisee evaluate a franchise opportunity? Explain. In evaluating whether or not to buy a franchise operation what questions should the potential investor ask about the franchisor, the franchise, the market and the potential investor (himself or herself)? What are the distinguishing features of a social venture from a conventional business and what would motivate an entrepreneur to take this pathway? Is the social enterprise development cycle different from that of a regular business? What are the three social enterprise models?

EXPERIENCING ENTREPRENEURSHIP Do you have what it takes to get on the pathway? Studies of successful entrepreneurs reveal common characteristics – family backgrounds, experiences, motivations, personality traits, behaviours, values and beliefs. How do you fit these Experience this activity patterns? What is your EQ (Entrepreneurial Quotient)? A US insurance company, Northwestern online 32 Mutual Life, created the following test to predict how suited you are to entrepreneurship. This test cannot predict your success – it can only give you an idea whether you will have a head start or a handicap with which to work. Entrepreneurial skills can be learned. The test is intended to help you see how you compare with others who have been successful entrepreneurs. Add or subtract your score as you evaluate yourself: 1 Significantly high numbers of entrepreneurs are children of first-generation immigrants. If your parents immigrated to your country, score one. If not, score minus one. 2 Successful entrepreneurs are not, as a rule, top achievers in school. If you were a top student, subtract four. If not, add four. 3 Entrepreneurs are not especially enthusiastic about participating in group activities in school. If you enjoyed group activities – clubs, team sports, double dates – subtract one. If not, add one.

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4 5

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Studies of entrepreneurs show that, as youngsters, they often preferred to be alone. Did you prefer to be alone as a youngster? If so, add one. If not, subtract one. Those who started enterprises during childhood – lemonade stands, family newspapers, greeting card sales – or ran for elected office at school can add two, because enterprise usually can be traced to an early age. If you didn’t initiate enterprises, subtract two. Stubbornness as a child seems to translate into determination to do things one’s own way – a hallmark of proven entrepreneurs. If you were stubborn as a child, add one. If not, subtract one. Caution may involve an unwillingness to take risks, a handicap for those embarking on previously uncharted territory. Were you a cautious youngster? If yes, deduct four. If no, add four. If you were daring or adventuresome, add four more. Entrepreneurs often have the faith to pursue different paths despite the opinions of others. If the opinions of others matter a lot to you, subtract one. If not, add one. Being tired of a daily routine often precipitates an entrepreneur’s decision to start an enterprise. If changing your daily routine would be an important motivation for starting your own enterprise, add two. If not, subtract two. Yes, you really enjoy work. But are you willing to work overnight? If yes, add two. If no, subtract two. If you are willing to work as long as it takes with little or no sleep to finish a job, add four more. Entrepreneurs generally enjoy their type of work so much they move from one project to another – non-stop. When you complete a project successfully, do you immediately start another? If yes, add two. If no, subtract two. Successful entrepreneurs are willing to use their savings to finance a project. If you are willing to commit your savings to start a business, add two. If not, subtract two. Would you be willing to borrow from others? Then add two more. If not, subtract two. If your business should fail, would you immediately start working on another? If yes, add four. If no, subtract four. Or, if you would immediately start looking for a job with a regular pay cheque, subtract one more. Do you believe being an entrepreneur is risky? If yes, subtract two. If no, add two. Many entrepreneurs put their long-term and short-term goals in writing. If you do, add one. If you don’t, subtract one. Handling cash flow can be critical to entrepreneurial success. Do you believe you have the ability to deal with cash flow in a professional manner? If so, add two. If not, subtract two. Entrepreneurial personalities seems to be easily bored. If you are easily bored, add two. If not, subtract two. Optimism can fuel the drive to press for success in uncharted waters. If you’re an optimist, add two. Pessimist, subtract two.

What’s your EQ (Entrepreneurial Quotient)? If you scored þ35 or more, you have everything going for you. You ought to achieve spectacular entrepreneurial success (barring acts of nature or other variables beyond your control). lf you scored þ15 to þ34, your background, skills and talents give you excellent chances for success in your own business. You should go far. If you scored 0 to þ15, you have a head start of ability and/or experience in running a business and ought to be successful in opening an enterprise of your own if you apply yourself and learn the necessary skills to make it happen. If you scored 0 to 15, you might be able to make a go of it if you ventured on your own, but you would have to work extra hard to compensate for a lack of built-in advantages and skills that give others a leg up in beginning their own business. If you scored 15 to 43, your talents probably lie elsewhere. You ought to consider whether building your own business is what you really want to do, because you may find yourself swimming against the tide if you make the attempt. Another work arrangement – working for a company or for someone else, or developing a career in a profession or an area of technical expertise – may be far more congenial to you and allow you to enjoy a lifestyle appropriate to your abilities and interests. Before making the final decision about going into business, a prospective entrepreneur needs to ask a number of personal questions. Ten of the most important ones are listed here. As you read, mark the response that best describes you.

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EXPERIENCING ENTREPRENEURSHIP The personal entrepreneurial action plan Complete the following by checking the box which most closely matches your answer. Follow the instructions at the end to ascertain your score. 1 Are you a self-starter?

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2

r I can get going without help from others. r Once someone gets me going, I am just fine. r I take things easy and do not move until I have to. How do you feel about others?

3

r I can get along with just about anyone. r I do not need anyone else. r People irritate me. Can you lead people?

4

r I can get most people to go along with me once I start something. r I can give the orders if someone tells me what should be done. r I let someone else get things done and go along if I like it. Can you take responsibility?

5

r I take charge and see things through. r I’ll take over if necessary but would rather let someone else be responsible. r If someone is around who wants to do it, I let him or her. Are you an organiser?

6

r I like to have a plan before I begin. r I do all right unless things get too confusing, in which case I quit. r Whenever I have things all set up, something always comes along to disrupt the plan, so I take things as they come. Are you a hard worker?

7

r I can keep going as long as necessary. r I work hard for a while, but then that’s it. r I cannot see that hard work gets you anywhere. Can you make decisions?

8

r I can make decisions, and they usually turn out pretty well. r I can make decisions if I have plenty of time, but fast decision making upsets me. r I do not like to be the one who has to decide things. Can people rely on your word?

9

r Yes, I do not say things I do not mean. r I try to level with people, but sometimes I say what is easiest. r Why bother? The other person does not know the difference. Can you stick with it?

r When I make up my mind to do something, nothing stops me. r I usually finish what I start. r If things start to go awry, I usually quit. 10 How good is your health? r Excellent. r Pretty good. r Okay, but it has been better.

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Now count the number of checks you have made next to the first responses and multiply this number by 3. Count the checks next to the second responses and multiply by 2. Count the number of times you checked the third answer. Total these three numbers. Of a possible 30 total points, a potentially successful entrepreneur should have at least 25 points. If not, the prospective entrepreneur should consider bringing in a partner or abandoning the idea of going into business alone. The potential entrepreneur should always keep in mind these personal factors while formulating the action plan.

CASE STUDIES CASE 5.1 An idea for the birds! Thanaphol Virasa is a salesperson for a large Thai company. He has a bachelor’s degree in marketing and is one of the company’s best salespeople. It is likely that Thanaphol will one day become a sales manager if he stays with the company. However, he secretly hopes to start his own business. Since he was hired seven years ago, Thanaphol has managed to build a nest egg of 5 million Thai baht (about 170 000 Australian dollars). He is now looking for a business that would require no more than 2 million Thai baht to get started. The rest would be used for operating capital and to keep him going until the company turns profitable. In the past, Thanaphol has gathered ideas by reading magazines that report new types of businesses. Last week, Thanaphol read a story that intrigued him. A man on the Malaysian border has been building ‘bird houses’ so that anyone can get into the lucrative Chinese Bird’s Nest business. These bird houses are purpose-built, reinforced concrete structures designed for swifts or swallows to build their nests. The white swiftlet’s nest is a Chinese edible delicacy. Bird’s Nest is a centuries-old Chinese medication yan wo or ‘swiftlet’s nest’ (yan ¼ swiftlet, wo ¼ nest). Swiftlets weave their nests from long, gooey saliva strands that come from glands under their tongues. The birds coil the threads of saliva into nests shaped like half a teacup. They attach them high off the ground against the walls of caves, abandoned apartments and now even small custom-built concrete bird houses. A bird’s nest factory can now be run by any peasant as long as they are situated near the sea. Although the benefits of edible bird’s nests are still scientifically disputed, Bird’s Nest has been used for thousands of years in traditional Chinese medicine and cooking. Bird’s Nest is one of the most valued commodities on the market today, typically costing about AU$4000 per kilogram. Currently these Bird’s Nest ‘factories’ sell for 300 000 Thai baht each. Thanaphol knows that few people can afford to pay this much for a bird house. He believes a market may exist for cheaper bird houses, in the range of 20 000 Thai baht each. Thanaphol has done the research and believes it would not be too difficult to differentiate his product from the standard bird house with all the same functionality. The two biggest obstacles will be marketing and production; that is, getting people to order bird houses from him rather than copying the design and building it themselves. Thanaphol believes that, with his background, he can handle the marketing and it should not be too difficult to find someone to handle the construction. Moreover, until the business takes off, he believes he can continue with his sales job. QUESTIONS

1 2 3

Is anything unique about Thanaphol’s idea? Explain. What is the first thing Thanaphol should do to follow up on his idea? Explain. When this is done, what else should Thanaphol do? Outline a general course of action for him.

CASE 5.2 Checking it out When Arlene Ryan inherited $150 000 from her grandfather, she decided to use the money to start her own business. Arlene has been a legal secretary for 14 years and feels she knows quite a lot about business. ‘Every day I take depositions and type legal memoranda,’ she noted to a friend. ‘And I’ve seen lots of businesses fail because they didn’t have adequate capital or proper management. Believe me, when you work for a law firm, you see – and learn – plenty’.

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Almost six months passed before Arlene decided on a business to pursue. A franchise ad in a business magazine caught her attention; Arlene called and found out that the franchiser was selling fast-food franchises in her area. ‘We are in the process of moving into your section of the country,’ the spokesperson told her. ‘We have 111 franchisees throughout the nation and want to sell 26 in your state.’ Arlene went to a meeting that the franchiser held at a local hotel and, along with a large number of other potential investors, listened to the sales pitch. It all sounded very good. The cost of the franchise was $75 000 plus 4 per cent of gross revenues. The franchiser promised assistance with site location and personnel training and encouraged the prospective franchisees to ask questions and investigate the organisation. ‘If you don’t feel this is a good deal for you, it’s not a good deal for us either; good business is a two-way street,’ the spokesperson pointed out. ‘We are going to be looking very carefully at all franchise applications and you ought to be giving us the same degree of scrutiny.’ Arlene liked what she heard but felt it would be prudent to do some checking on her own. Before leaving the meeting, she asked the spokesperson for the names and addresses of some current franchisees. ‘I don’t have a list with me,’ he said, ‘but I can write down some that I know of, and you can get their numbers from Google’. He then scribbled four names and locations on a piece of paper and handed it to her. Arlene called information and was able to get telephone numbers for only two of the franchises. The other addresses apparently were wrong. She then placed calls to the two franchisees. The first person said she had owned her franchise for one year and felt it was too early to judge the success of the operation. When she found out Arlene was thinking about buying a franchise, she asked if Arlene would consider buying hers. The price the woman quoted was $5000 less than what the company currently was quoting. The second person told Arlene he simply did not give out information over the phone. He seemed somewhat edgy about talking to her and continually sidestepped Arlene’s requests for specific financial information. Finally, he told her, ‘Look, if you really want this information, I think you should talk to my lawyer. If he says it’s okay to tell you, I will’. He then gave Arlene the lawyer’s number. Something didn’t feel quite right about this so before she called the lawyer she thought she would think it over during her lunch break. When she returned, she had decided that further investigation was necessary. She felt she needed more information about what a potential franchisee could expect from the franchisor making such an offer. She wondered where she may obtain further information and what specific rights she may have if she would buy into a franchise. What should she ask and who should she ask to get the right answers? If she didn’t buy this franchise there would be others. On arriving back at her desk one of the law firm’s partners was waiting for her. ‘Hey, Arlene, what are you doing calling this guy?’ he asked, holding up the telephone number of the franchisee’s lawyer. ‘Are you planning to sue someone? That’s his specialty, you know’. Arlene smiled. ‘As a matter of fact, I am. I’m thinking of suing you guys for back wages.’ The lawyer laughed along with her and then walked back into his office. QUESTIONS

1 2 3

What is your appraisal of the situation? Where should Arlene go to seek further information about her rights as a franchisee? What should Arlene expect to be provided by the franchisor? Assemble a check list that could guide her enquiries. What would you recommend Arlene do now? Be complete in your answer.

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

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SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. bootstrapping resourcing 1

2

3

social enterprise

Find and read the article by Howard Van Auken (2005), ‘Differences in the usage of bootstrap financing among technology-based versus nontechnology-based firms’, Journal of Small Business Management, 43(1), 93–103. Explain the difference between bootstrap financing methods that improve cash flow and those methods that slow disbursements. Provide an example of each method. Find and read the article ‘Riding the practice waves: Social resourcing practices during new venture development’ by A. Keating, S. Geiger and D. McLoughlin (2014) in Entrepreneurship Theory and Practice (September), pp. 1207–35. Drawing upon insights from the article, draw up your own ‘practice nets’ and describe how you might use them. Find and read the case ‘The Empty Bowls Project: Creating, leading and sustaining a social enterprise’ by S. E. Anderson, B. S. Coffey and H. Dixon-Fowler in Entrepreneurship Theory and Practice (2014), 38(5), pp. 1237–45. Put yourself in Lisa Blackburn and John Hartom’s shoes and imagine your own social enterprise facing these same challenges. What elements would you put in place at the outset of the venture that would serve to prepare the venture for long-term succession?

ENDNOTES 1 Kurtzman, J. (2005). Start-ups that work. The 10 critical factors that will make or break a new company. New York: Portfolio Hardcover. 2 Cooper, A. C. & Dunkelberg, W. C. (1986). Entrepreneurs and paths to business ownership. Strategic Management Journal, 7(1), 53–68. 3 Stengel, G. (2012). Why girl scouts become entrepreneurs, Inc., 19 March 2012, http://www.inc.com/geri-stengel/ why-girl-scouts-becomeentrepreneurs_1.html. 4 Raijman, R. & Tienda, M. (2000). Immigrants’ pathways to business ownership: A comparative ethnic perspective. International Migration Review, 34(3), Fall, 682–706; Fong, R., Busch, N., Armour, M., Heffron, L. C. & Chanmugam, A. (2007). Pathways to selfsufficiency: Successful entrepreneurship for refugees. Journal of Ethnic & Cultural Diversity in Social Work, 16(1/2), 127–59; Brush, C. G., N. M. Carter, et al. (2006). The use of bootstrapping by women entrepreneurs in positioning for growth. Venture Capital, 8(1), 15–31; Jones, O. & Jayawarna, D. (2010). Resourcing new businesses: Social networks, bootstrapping and firm performance.

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Venture Capital, 12(2), 127–52; Mitra, S. (2009). Entrepreneur journeys: Bootstrapping: Weapon of mass reconstruction. Home Business Magazine: The Home-Based Entrepreneur’s Magazine, BookSurge Publishing; Sherman, A. J. (2005). Raising capital: Get the money you need to grow your business. American Management Association International; Winborg, J. (2009). Use of financial bootstrapping in new businesses: A question of last resort? Venture Capital, 11(1), 71–83. 5 Kotelnikov, V. Bootstrapping, http:// www.1000ventures.com/venture_ financing/bootstrapping_methods_ fsw.html. See also Gianforte, G. (2006). Why bootstrapping works. American Venture, 40–1; Jones, Oswald & Jayawarna, D. (2010). Resourcing new businesses: Social networks, bootstrapping and firm performance. Venture Capital, 12(2), 127–52; Kawasaki, G. (2009). 10 tips for successful bootstrapping. Entrepreneur, 37(5), 36; Markova, S. & Petkovska-Mircevska, T. (2009). Financing options for entrepreneurial ventures. Amfiteatru Economic, 11(26), 597–604; Winborg, J. (2008). Why do they use financial

bootstrapping? A quantitative study of new business managers. In H. Landstrom, H. Crijns, E. Laveren & D. Smallbone (eds), Entrepreneurship, sustainable growth and performance: Frontiers in European entrepreneurship research, 77–90, Cheltenham, UK; Northampton, MA: Elgar; Winborg, J. (2009). Use of financial bootstrapping in new businesses: A question of last resort? Venture Capital, 11(1), 71–83. 6 Other excellent resources include Bill McCready, Alternative financing: Venture capital is not the only way, http://ecoach.narod.ru/venture_financing/ vc_alternatives_byvpa.html; Worrell, D. (2002). Bootstrapping your start-up. Entrepreneur’s Start-Ups Magazine, October, http://www.entrepreneur.com/ magazine/entrepreneursstartupsmagazine/ 2002/october/55776.html. 7 Reynolds, P. D. (2011). Informal and early formal financial support in the business creation process: Exploration with Psed Ii Data Set. Journal of Small Business Management, 49(1), 27–54; Servon, L. J., Visser, M. A. & Fairlie, R. W. (2010). The continuum of capital for small and micro enterprises. Journal of

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Developmental Entrepreneurship, 15(3), 301–23. 8 Ssewamala, F. M. & Sherraden, M. (2004). Integrating saving into microenterprise programs for the poor: Do institutions matter? Social Service Review, 78(3), 404–29. 9 Yuthamanop, P. (2008). Grassroots policies getting a rethink: Beneficiaries say money was well spent. Bangkok Post, 23 December. See also Huttasin, N. (2008). Perceived social impacts of tourism by residents in the OTOP Tourism Village, Thailand. Asia Pacific Journal of Tourism Research, 13(2), June, 175–91; Chaiprapat, S., Limsakul, B. & Sirivongpaisal, N. (2008). A feasibility study on establishing distribution centres for One Tambon One Product (OTOP) Project in Songkhla Province. International Journal of Integrated Supply Management, 4(1), January, 34–48; Atthirawong, W. & Neammancee, P. (2009). A business model for Otop in Thailand: Case study on value added mango. Department of Applied Statistics, Faculty of Science, King Mongkut’s Institute of Technology, Bangkok; Kruijssen, F., Keizer, M. & Giuliani, A. (2009). Collective action for small-scale producers of agricultural biodiversity products. Food Policy, 34(1), 46–52. 10 ‘You don’t need to be big to test the water’. Sunday Times, 25 June 2006; Westphal, L. (2006). Marketing to minipreneurs. NZ Marketing Magazine, 25(1), February. 11 Moutinho, L., Ballantyne, R. & Rate, S. (eds). (2011). Futurecast applied to tourism. In L. Moutinho (ed.), Strategic management in tourism. CAB International, 28. 12 See the latest online and consumer trends on http://www.trendwatching.com. 13 Kirton, M. (1976). ‘Adaptors and Innovators: A Description and Measure’, Journal of Applied Psychology (October): 622–29. 14 Facebook (2015). Company Info, http://newsroom.fb.com/company-info. 15 Kell, J. (2014). Facebook’s market cap nearing $200 billion. Fortune, 24 July, http://fortune.com/2014/07/24/ facebooks-market-cap. 16 Alon, I. & Sardy, M. (2010). Franchising as an entrepreneurial form. In I. Alon (ed.), Franchising globally: Innovation, learning and imitation, 36–53: New York: St Martin’s Press, Palgrave Macmillan; Combs, J. G., Jr, Ketchen, D. J. & Short, J. C. (2011). Franchising research: Major milestones, new directions, and its future within entrepreneurship. Entrepreneurship:

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Theory & Practice, 35(3), 413–25; Ketchen, D. J. Jr, Short, J. C. & Combs, J. G. (2011). Is franchising entrepreneurship? Yes, no, and maybe so. Entrepreneurship: Theory & Practice, 35(3), 583–93. 17 Kuratko, D. F. & Hornsby, J. S. (2009). New venture management. Upper Saddle River, NJ: Pearson/Prentice Hall, 33–8. 18 Steingold, F. & Dostow, E. (2005). The complete guide to buying a business. Berkeley CA: Nolo Press. 19 Singer, G. D. & Wodar, B. D. (2011). Selling a business. Mergers & Acquisitions: The Dealmaker’s Journal, April. 20 For a good discussion of buying or selling a small business, see Rene V. Richards, How to buy and/or sell a small business for maximum profit. Atlantic Publishing Co; Pap/Cdr edition (25 January 2007). 21 See Lewicki, R. J., Saunders, D. M. & Minton, J. W. (2002). Negotiation (3rd edn). New York: McGraw Hill/Irwin. This paperback gives practical examples and advice about negotiating. See also Watkins, M. (2003). Negotiation: Harvard Business Essentials. Boston: Harvard Business School Press. 22 For an excellent overview of franchises, see Barkoff, R. (2009). Fundamentals of franchising. American Bar Association (3rd edn); Benjamin, K. & Smart, B. (2011). The franchising bible: How to plan, fund and run a successful franchise. Crimson Publishing; Roger LeRoy Miller & Frank B. Cross, The legal environment today: Business in its ethical, regulatory, e-commerce, and global setting (7th ed.). Mason, OH: South-Western/ Cengage, 2013; Kenneth W. Clarkson, Roger LeRoy Miller & Frank B. Cross, West’s Business Law (12th ed.). Mason, OH: South-Western/Cengage, 2012, 708–16. 23 Kaufmann, P. J. (1999). Franchising and the choice of self-employment. Journal of Business Venturing, July, 345–62; David J. Ketchen, Jr, Jeremy C. Short & James G. Combs. Is franchising entrepreneurship? Yes, no, and maybe so; Nada Mumdzˇiev & Josef Windsperger. The structure of decision rights in franchising networks: A property rights perspective. Entrepreneurship Theory and Practice 35(3) (2011), 449–65; Roland E. Kidwell & Arne Nygaard. A strategic deviance perspective on the franchise form of organizing. Entrepreneurship Theory and Practice, 35(3) (2011), 467–82. 24 Williams, D. L. (1999). Why do entrepreneurs become franchisees? An empirical analysis of organizational

choice. Journal of Business Venturing, January 1999, 103–24; Je´roˆme Barthe´lemy. Agency and institutional influences on franchising decisions. Journal of Business Venturing 26(1) (2011), 93–103; Mark A. P. Davies, Walfried Lassar, Chris Manolis, Melvin Prince & Robert D. Winsor. A model of trust and compliance in franchise relationships. Journal of Business Venturing 26(3) (2011), 321–40. 25 Lord, S. (2011). Trans-Tasman franchising: The same but different. NZ Business, 25(6), 57. 26 Lincoln, T. (2008). Victims of scam want Government help. New Zealand Herald, 2 September. 27 Stewart, G. (2009). New Zealand – Government says no to franchising regulation. International Journal of Franchising Law, 7(5), 27–38. 28 Humphrey, H. H. (1911–1978), US Democratic politician, vice-president, speech, 26 January 1967, Washington, DC, to international newspaper advertising executives, cited in The Columbia World of Quotations, 1996, http://www.bartleby.com/66/59/ 29659.html. 29 Adapted from Emerson, J. & Twersky, F. (1996). New social entrepreneurs: The success, challenge and lessons of nonprofit enterprise creation. San Francisco: Roberts Foundation. 30 Bhowmick, S. (2011). Social cause venturing as a distinct domain. Journal of Social Entrepreneurship, 2(1), 99–111. 31 Sutia Kim Alter. (2000). Managing the double bottom line: A business planning reference guide for social enterprises (revd edn). Save the Children, 8. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License, http://creativecommons.org/licenses/bysa/3.0. See also Alter, S. K. (2006). Social enterprise models and their mission and money relationships. Social entrepreneurship: New models of sustainable social change, 205–32; Alter, K. (2004). Social enterprise typology. Virtue Ventures LLC. Other interesting material about social enterprise models: Kerlin, J. A. (2010). A comparative analysis of the global emergence of social enterprise. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 21(2), 162–79; RidleyDuff, R. & Bull, M. (2011). Understanding social enterprise: Theory and practice. Sage. 32 Available at http://diydollars.com/ self-employment-news/whats-your-eqdetermine-your-entrepreneurial-quotient.

» CHAPTER SIX OPPORTUNITY AND THE CREATIVE PURSUIT OF INNOVATIVE IDEAS

1

Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation.

CHAPTER OBJECTIVES

Peter F. Drucker, Innovation and Entrepreneurship1

To explore how ideas fit within the opportunity identification process

Imagine a world in which all the things we make, use and consume provide nutrition for nature and industry, a world in which everything is so intelligently designed that human activity generates a delightful, restorative ecological footprint. Imagine having the choice, in every sphere of life – at home, on the job, travelling from place to place – to use goods and services that enhance the well-being of your community. Imagine those goods designed with only safe, healthful materials that can be either returned to the earth to replenish the soil or recovered by their manufacturers to be up-cycled into products of higher value, virtually eliminating the concept of waste. Think of packaging becoming food for the pea patch, automobiles designed for disassembly, and cost effective factories powered by the energy of the sun. Imagine high-tech buildings so in tune with the biosphere that they inhabit the landscape like native trees, making oxygen, sequestering carbon, fixing nitrogen, purifying water, providing habitat for thousands of species, accruing solar energy, building soil and changing with the seasons – while also generating remarkable productivity and providing beauty, comfort and delight. And then consider the many ways in which these changes, this rediscovery of our connection to life, could revitalise our cities, our economies and our nations, remaking the way we make things and transforming humanity’s relation to the Earth.

2 To define and illustrate the sources of opportunity for entrepreneurs 3 To identify the four models of market opportunity: competition, innovation, alertness and social need 4 To examine the role of creativity and to review the major components of the creative process: knowledge accumulation, incubation process, idea evaluation and implementation 5 To present ways of developing personal creativity: recognise relationships, use lateral thinking, use your ‘brains’, think outside the box, identify arenas of creativity and work in creative climates 6 To introduce how innovation can inspire opportunity through invention, extension, duplication and synthesis 7 To review some of the major misconceptions associated with innovation and to define the 10 principles of innovation 8 To consider the challenges and changing dynamics of social and sustainability innovation

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

William McDonough, The Natural Advantage of Nations2

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IDEAS AND THE SEARCH FOR OPPORTUNITY Identifying and shaping opportunity is central to the domain of entrepreneurship. As one researcher states, ‘at its core entrepreneurship revolves around the questions of why, when and how opportunities for the creation of goods and services in the future arise in an economy’.3 Therefore, both opportunity creation and recognition are fundamental to value creation of individuals and societies. Understanding the opportunity identification process is one of the primary preoccupations of entrepreneurship research.4 This chapter is devoted to examining how the creative pursuit of innovative ideas revolves around opportunity; particularly ideas that may be endowed with positive social and economic potential. Creativity and innovation are two major topics that are keys to understanding and practising opportunity development for entrepreneurs. Innovation in its purest sense refers to newness5 but do not assume that just because something is new that it will automatically create value or be perceived as inherently positive and good. As we often read in the popular press, sometimes value is perceived after the fact based upon the strengths of its performance. Our challenge as entrepreneurs however is to innovate a new product, service, process, market or business concept6 that we foresee will create future value. Emphasis is on foresight. To perceive the value of innovation in advance requires entrepreneurial judgement, and it is both art and science. This involves a thorough assessment of the idea discussed later in Chapter 9 and to some extent instinct about what and how customers will value the innovative offering. Some researchers even say that entrepreneurs have some kind of extra-sensory perception (ESP) to be able to see what others cannot see over the horizon!7 Entrepreneurial opportunities rely on new and innovative ideas, and to bridge the gap between ideas and opportunities – or between invention and innovation – the characteristics of the entrepreneur discussed in Chapter 2 are often fundamentally important assets. The first step for any entrepreneur is coming up with an idea that may be the foundation of a good opportunity. The search for good opportunities starts with the recognition of ideas that have potential. Thus, in this chapter we first examine the sources that can be used for this search and the models of opportunity to which ideas can be applied. We then focus on how an entrepreneur can work towards the discovery or creation of high potential, innovative ideas. In a later chapter we will discuss the skills and techniques required to analyse ideas to confirm opportunity potential. The most important areas to be aware of are often within the grasp of our own knowledge. Let us examine some of the key sources of innovative ideas.

SOURCES OF INNOVATIVE IDEAS On CourseMate Express read about sources of entrepreneurial opportunities both internal and external.

Potential entrepreneurs will need determination, persistence and alertness, in differing measures, to take advantage of ideas that create the opportunities found in the external and internal environments in which they live. These characteristics will allow an entrepreneur to create an opportunity from an idea that others may ignore for lack of will, give up on for lack of energy or simply do not see or recognise. The following are some of the most effective sources of entrepreneurial opportunities. • Trends: Trends signal shifts in the current paradigm (or thinking) of the major population. Observing trends closely will enable an entrepreneur to position an idea fitting with the trend and recognise a potential opportunity. Trends need to be observed in society, technology, economy and government. Following are some examples of such trends: – societal trends: ageing demographics, health and fitness growth, senior living, social media – technology trends: smart phone technology, e-commerce, Internet advances, drones, miniaturisation

Chapter 6: Opportunity and the creative pursuit of innovative ideas 193

•

•

•

•

•

•

– economic trends: higher disposable income, dual wage-earner families, performance pressures, rising fuel costs – political trends: increased regulations, terrorism, sovereign debt, military alliances, free trade agreements – environmental trends: global warming, drought, increased severity of storms, increased frequency of bushfires, pollution. Unexpected occurrences: These are successes or failures that, because they were unanticipated or unplanned, often end up proving to be a major innovative surprise to the business. For example, Alexander Fleming was surprised to note that a contamination of a bacterial plate culture suppressed the growth of his bacteria. He identified the contamination as penicillin mould. Later, Australian scientist Howard Florey drew on Fleming’s observation to create the industrial-scale manufacture of penicillin.8 Incongruities: These occur whenever a difference exists between expectations and reality. Innovation is the creation of solutions to incongruities. In the 1980s Ken Kutaragi was watching his daughter playing with a Nintendo Entertainment System which produced poorquality sound and relied on a magnetic tape drive and wondered why such a good game had such terrible sound. Ken knew from his research with Sony that he could develop a better product for Nintendo. Attentiveness to this incongruity led Nintendo to contract Sony for its next generation machine that incorporated better sound and floppy disk technology. Although Kutaragi nearly lost his job for contracting to a competitor, eventually this led to the development of Sony’s Playstation product range which was a key pillar in Sony’s profitability for many years.9 Process needs: For example, process gaps or bottlenecks. These occur when an answer to a particular need is required. Venture capitalists often refer to these as ‘pain’ that exists in the marketplace. The entrepreneur must recognise an innovation solution, or ‘painkiller’. Examples include the creation of new medical devices, health foods, pharmaceuticals, timesaving devices and eco-sustainable green manufacturing. Industry and market changes: Continual shifts in the marketplace occur, caused by developments such as consumer attitudes, advancements in technology, industry growth and the like. Industries and markets are always undergoing changes in structure, design or definition. An example is found in the healthcare industry where hospital care has undergone radical change and where home healthcare and preventive medicine have replaced hospitalisation and surgery as primary focus areas. The entrepreneur needs to be aware of and seize these emerging opportunities. Demographics: These arise from trend changes in population, education, income changes, age, occupations, geographic locations and similar factors. Demographic shifts are important and often provide new entrepreneurial opportunities. For example, as the average population age in Australia’s Gold Coast has increased (due largely to the influx of retirees), land development, recreational and healthcare industries have all profited. Perceptual changes: These changes occur in people’s interpretation of facts and concepts. They are intangible yet meaningful. Perception can cause major shifts in ideas to take place. For example the increasingly popular perceived need to be healthy and physically fit has created a demand for both health foods and health facilities. Another example is people’s desire to use their personal time better. As a result, the travel industry has capitalised on consumers’

Go to CourseMate Express to read about finding the narrow gap. Entrepreneurs who are good at niche spotting

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Why do ventures fail? On CourseMate Express read about the top 10 blunders that you should avoid.

current need to see the world while they are young and healthy, so time-share holiday destinations and travel clubs have increased. • Knowledge-based concepts: These are the basis for the creation or development of something brand new. Inventions are knowledge-based; they are the product of new thinking, new methods and new knowledge. Such innovations often require the longest time period between initiation and market implementation because of the need for testing and modification. For example, today’s smart phone technology has advanced to transform the mobile phone into a camera, Internet access resource and music provider. This has revolutionised the way we use different technologies today. These concepts were not thought possible ten or so years ago. Entrepreneurs seem to have a keen sense of an opportunity and often avoid being caught by misleading information that may derail the focus of others. Professor Gaglio claims that entrepreneurs tend to have a capacity to assess uncertainty in a changing situation and accurately determine what is relevant and what is not. She also says that entrepreneurs look deeply into the real causes of change and will often interpret and infer practical, social and commercial implications with a high degree of accuracy, avoiding alternative possibilities that prove to be ungrounded and fictional.10 Some examples of innovations that have emerged from the sources of ideas are presented in Table 6.1. TABLE 6.1

SOURCES OF INNOVATION

SOURCE

EXAMPLES

Unexpected occurrences

Viagra, Apple Computer, Klingon language from Star Trek, Penicillin, Wikileaks

Incongruities

Overnight package delivery, Playstation, steel mini-mills and roll-on, roll-off container shipping

Process needs

Sugar-free products, caffeine-free coffee, microwave ovens, nicotine patches

Industry and market changes

Healthcare industry – changing to home healthcare, online retailing of things in manufacturing

Demographic changes

Retirement communities, new ethnic communities

Perceptual changes

The growing concern for fitness and body image, same sex marriage

Knowledge-based concepts

Smart phone technology, pharmaceutical industry, robotics and drones

FOUR MODELS OF MARKET-BASED OPPORTUNITIES To be entrepreneurial, innovative ideas must find a market. To develop the concept of a market-based opportunity for entrepreneurship, first one must appreciate the concept of a static economy.11 A static economy is one where there is a balance between supply and demand, as shown in Figure 6.1. There is established and respectful competition in existing markets with each competitor maintaining market share and not competing for more; meaning that there is no growth. The supply chain and the channels to market are established and there are no new entrants to destabilise the market. The activity of business is to coordinate the production and services at the most efficient levels. The economy works in a harmonious way and neither demand nor supply will go up or down. The wealth of the economy remains at a plateau. This is a static economy, one that is ripe for entrepreneurial opportunity.

Chapter 6: Opportunity and the creative pursuit of innovative ideas 195

FIGURE 6.1 A STABLE ECONOMY IS ONE WHERE THERE IS BALANCE BETWEEN SUPPLY AND DEMAND

Of course, this is also a fictitious state of affairs, but it is a useful way of conceiving the economy to understand entrepreneurial opportunities. The economic function of the entrepreneur is to disturb this static, stable and harmonious economy. Entrepreneurial activity involves putting innovative ideas to use in the market and coordinating some form of disruption or repositioning of the marketplace. It is the entrepreneur who undertakes an enterprise that creates the dynamics of an economy. Those who seek to maintain static businesses in predictable economies are business managers.

THE COMPETITION MODEL OF MARKET OPPORTUNITY Richard Cantillon has been credited as the first person to observe the contribution of an entrepreneur to an economy.12 Cantillon’s entrepreneur identified opportunities where demand was sufficiently high to be able to obtain a high selling price for goods or services while simultaneously being aware of opportunities to obtain supply of goods and services (or the inputs to the goods and services) at low buying prices. This form of trading opportunity is called arbitrage. Arbitrage is essentially purchasing low and selling high, just as currency traders wish to do. The entrepreneur, in Cantillon’s view, is someone who uses arbitrage (trade off of/leverage) demand and supply discrepancies to make a profit. Finding market discrepancies – whether purely arbitrage in price advantage or other forms of market advantage or differentiation among competitors – often provides opportunities in highly competitive and mature markets. The effect of this activity is to introduce dynamics that alter the supply and demand behaviours in existing markets. This drives the supply and demand equation to a new point of equilibrium by either finding inefficiencies in the supply of the existing goods or exploiting or even creating shifts in demand patterns (see Figure 6.2). Cantillon’s entrepreneur and arbitrage – or demand/supply-driven opportunities – create growth in an economy by increasing the number of companies and expanding the market. Of course, there are also losses in the market when the new opportunities replace existing companies or drive them

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FIGURE 6.2 THE COMPETITION MODEL OF MARKET OPPORTUNITIES: EXPLOITING COMPETITIVE MANOEUVRES

out of business. This form of entrepreneurship is steeped in competitive manoeuvres for the trading of existing goods and services.

EXPLOITING A DEMAND NICHE Unbelievably, at 18, Carolyn Creswell found herself offering her life savings to buy out her employer. ‘It was a small business that made homemade muesli for a few cafes and delis in and around Melbourne’, Carolyn says. ‘I worked there one day a week while I was at uni, and I loved it. When the owners put the business up for sale, I thought my job would be in jeopardy EDGE so I offered them $1000 which was initially dismissed, then, finally they took up my offer.’ In 1992, despite the presence of such large market players as Kellogg’s¤, the Sanitarium Health Food Company and Uncle Tobys, Carolyn entered the muesli business and the mature breakfast cereal market with the Carman’s brand. By defining a niche market to exploit a demand opportunity, riding nutrition trends, using smart packaging and design and with determination and persistence, Carolyn now operates a multinational business that exports to 25 countries. Carman’s has been named one of the Business Review Weekly’s Fastest 100 Growing Companies and in 2007 Carolyn won the Ernst and Young national Young Entrepreneur of the Year Award.

ENTREPRENEURIAL

Source: Adapted from Carman’s Fine Foods, http://www.carmansfinefoods.com.au.

THE INNOVATION MODEL OF MARKET OPPORTUNITY Let’s look at opportunity from the point of view of innovation and emerging new markets. This entrepreneur – as Joseph Schumpeter described in his work – is proactive in the economy as the firm introduces new goods and services that disrupt existing markets and create new ones. This model of opportunity essentially introduces a new supply and demand dynamic into the marketplace and disrupts the equilibrium of the static market system. The entrepreneur in this case creates a demand

Chapter 6: Opportunity and the creative pursuit of innovative ideas 197

for the new good or service and attracts the attention of customers by educating them and enticing a move away from the existing market to create a new platform for economic growth. As shown in Figure 6.3, Schumpeter’s entrepreneur introduces new goods or services into the economy that provide growth potential. As distribution of and demand for the new goods or services increases, it creates new jobs and new businesses. Yes, this may actually cannibalise existing goods and services, causing losses in an economy, but overall output is theorised to increase. This form of entrepreneurship requires commitment to the creative forces within the economy (research and development, for instance) and the desire for it has fuelled the innovation agenda of governments and companies alike in more recent years. FIGURE 6.3 THE INNOVATION MODEL OF MARKET: DISRUPTING ESTABLISHED MARKETS

STICKING TO A RADICAL PLAN In the mid-1960s, Professor Graeme Clark began researching the possibility of an electronic, implantable hearing device that implants in the cochlea, the inner ear that contains the sense of hearing. His colleagues said a cochlear implant wouldn’t work while others warned of the unknown risks. There was also the lack of funding and the technological challenge of fitting electrodes into the tiny inner ear. In 1978, Professor Clark’s drive to innovate paid off and the first cochlear implant surgery took place – the surgery was a success. From this success, Cochlear Australia, the company, was born. Its purpose: to make Professor Clark’s innovative multi-channel cochlear implant commercially available all over the world. Over 200 000 severely or profoundly deaf children and adults have received a cochlear implant thanks to Graeme Clark’s radical new product that revolutionised the market for the hearing impaired.

ENTREPRENEURIAL EDGE

Source: Adapted from ‘About Graeme Clark’ and ‘Cochlear celebrates 30 years of hearing revolution’, published by Cochlear Ltd, ª 2015.

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THE ALERTNESS MODEL OF MARKET OPPORTUNITY A third opportunity model stems from the Knowledge School of economics and is credited to Ludwig von Mises and was later championed by Israel Kirzner. This form of entrepreneurial opportunity relies on a combination of the previous two opportunity models but places a higher emphasis on the knowledge of the entrepreneur. It assumes that opportunities are ‘out there’, already in existence and waiting to be discovered. The entrepreneur is the one who recognises them due to superior levels of knowledge about the market, industry, technology or networks (refer to Figure 6.4). The entrepreneur has the advantage of seeing things differently and acting upon unique insight grounded in superior knowledge. FIGURE 6.4

THE ALERTNESS MODEL OF MARKET OPPORTUNITY: USING INNOVATION TO COMPETE IN ESTABLISHED MARKETS

Disruption to the stable economy comes about because new businesses are created that combine new and mature market forms of opportunity. Consequently these new businesses are seen as valuable since they drive employment. The focus on an entrepreneur’s knowledge risks diverting attention away from that which originally defined entrepreneurship through economic impacts and influence on market dynamics. Instead the mere act of creating a business can become the major focus and be the defining act of entrepreneurship. The effects of the business on an economy are easily overlooked in terms of the economic and social contribution in favour of pure employment creation.

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COMBINING UNIQUE INSIGHT, EMERGING TECHNOLOGY AND NETWORK KNOWLEDGE

ENTREPRENEURIAL

The son of small hawkers, vegetable sellers in Singapore, Jackie Lee Choon Yau grew up selling baskets of vegetables. ‘I told myself that there has to be a much better way of making money EDGE and doing business.’ His company Hardwarezone.com consistently ranks as the number one technology portal in South-East Asia. It provides IT news, product releases, hardware pricelists and forums. What started as a hobby for Jackie and five mates on SGD $1000 capital became a new-age media company, leveraging off the mature magazine and catalogue marketplace, with over SGD $200 000/month in advertising revenue and SGD $2 million in net assets within a short span of six years. Their success built through having an eye for opportunity with emerging technology and unique insight into the hobbyist IT market and the strength of their network in the IT community sparked exceptional growth, and defied most of its competitors and other dotcom ventures in Singapore that fell by the wayside or stagnated after the dotcom crisis during mid-1999. Jackie sold the company to SPH at the end of 2006, then started clickTRUE within SPH as an intrapreneur, a separate business unit that focuses on pay-per-performance advertising. By the end of 2010, he did a management buyout of clickTRUE. ‘I think my parents have influenced me to help me succeed.’

Sources: Tan, C. C. & Tan, G. W. (2005), Hardwarezone: A Singaporean success story, Idea Group Publishing, Hershey PA, USA; Hardwarezone.com, SPH Magazines, http://www.sphmagazines.com.sg/magazines/hardwarezone; Spirit of enterprise, Dr Jackie Lee Choon Yau, ª 2015 and Clicktrue.biz..

THE SOCIAL NEED MODEL OF MARKET OPPORTUNITY In recent decades there has been a huge increase in innovations created by social ventures. Dedicated non-profits as well as hybrid businesses have all been creative with opportunities in the social innovation sphere. Social innovation is different from ‘economic innovation’. More than inventing new types of production to make markets more efficient or exploiting new markets to increase market effectiveness, social innovation seeks to satisfy needs not satisfied and unlikely to be satisfied by the market. In other words, social entrepreneurs use market-based opportunities to address a social problem and by doing so they expand the utility of the market to include a social function over and above a commercial function. Social entrepreneurs recognise and respond to social needs by forming a market-based solution to address a social problem. In this case the entrepreneur recognises an opportunity grounded in competition, innovation and/or alertness which allow market-based economics to be focused on solving a social problem (refer Figure 6.5). In Chapter 4 we introduced three models of social ventures, and so you should appreciate that the social venture is not too dissimilar to the commercial venture except that the customers, suppliers or workforce have a special characteristic – typically being a disadvantaged social group, or the venture has a social mission be it an environmental purpose, animal welfare or other worthwhile activity to support. In Chapter 8, we will discuss social intrapreneurs, namely social entrepreneurs who work within large organisations. Researchers at Stanford University have defined social innovation as ‘a novel solution to a social problem that is more effective, more efficient, more sustainable, or more just than the existing solutions and for which the value created accrues primarily to society as a whole rather than to private individuals’.13 Yet they maintain that social innovations are products of the times, of a particular period in history. Today private businesses are being forced to consider the social impact of their conduct in society. There is now a cross-fertilisation between the non-profit, governmental and

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THE SOCIAL NEED MODEL OF MARKET OPPORTUNITY: EXPANDING UTILITY OF THE MARKET

Shutterstock/Jesus Keller

FIGURE 6.5

private sectors that is propelling social innovation. These Stanford researchers list some recent social innovations that have made it to the big time: • Community-centred planning: a process that enlists the knowledge and resources of local residents to help craft solutions appropriate to local needs. Allowing people to create and implement their own plans for the community helps lead to sustainable development. • Emissions trading: a pollution control program that uses economic incentives to reduce emissions. A cap is set on the total amount of a certain pollutant that can be emitted, and permits to pollute are issued to all participating businesses. Those with higher emissions can buy credits from businesses that have reduced their emissions. Over time the cap is reduced. • Fair trade: an organised movement that establishes high trade standards for coffee, cocoa, sugar and other products. By certifying traders who pay producers a living wage and meet other social and environmental standards, the fair-trade movement improves farmers’ lives and promotes environmental sustainability. • Habitat conservation: an agreement that creates economic incentives for wildlife conservation by allowing development in the habitat of an endangered species if the property owner protects endangered species in another location. • International labour standards: legally binding standards that protect workers’ rights to freedom, equity, security and human dignity. The standards were developed by the International Labour Organization, governments, employees and workers, and are enforced by member countries. • Microfinance: financial institutions that provide services such as banking, lending and insurance to the poor and disadvantaged who otherwise have no access to these services. By saving money, getting loans and having insurance, the poor can improve their lives and even rise out of poverty.

Chapter 6: Opportunity and the creative pursuit of innovative ideas 201

• Socially responsible investing: an investment strategy that attempts to maximise both financial and social returns. Investors generally favour businesses and other organisations whose practices support environmental sustainability, human rights and consumer protection. • Supported employment: programs that help disabled or disadvantaged workers find and retain good jobs. Services include job coaches, transportation, assistive technology, specialised job training and individually tailored supervision.

CREATING A SOLUTION TO A SOCIAL PROBLEM THROUGH COMMERCIAL OPPORTUNITY

ENTREPRENEURIAL

In 2008, Daniel Flynn, Co-founder and Managing Director of Thankyou Group, was a university student working with a small team of peers on their ‘5-year plans’. They were struck by the EDGE injustice of the fact that there were people their own age on the other side of the world facing horrific daily battles. They discovered the world water crisis and the fact that even in these modern times around 900 million people don’t have access to safe drinking water. At the same time, they learned that Australians spend a crazy $600 million annually on bottled water – an industry that they thought seemed ludicrous when considering that free water from the tap is part of an Australian way of life. They came up with a bold idea to join these two extremes together to make a difference. The result – a bottled water company for the sole purpose of funding safe water projects in developing nations. It sounded pretty simple. Little did they know that it would be the hardest thing they’d ever do. But after a lot of hard work and persistence and a few miracles thrown in, Thankyou Water was born. Today, Thankyou Water has evolved into Thankyou, a movement overseeing three different brands – Thankyou Water, Thankyou Food and Thankyou Body Care. Now, they don’t just provide safe water access for those in need, but also access to food and hygiene solutions. The mission hasn’t changed – Thankyou exists to empower the everyday Australian to make a difference through a simple choice within their everyday life. Source: Adapted from Thankyou Group, http://www.thankyou.co/movement/our-story.

DEVELOPING ENTREPRENEURIAL CAPACITY Once the sources of ideas are recognised, entrepreneurs must use their existing knowledge base, acquired through work, experience and education, to hone ideas into one of the models of market opportunities. General industry knowledge, prior market knowledge, prior customer understanding, specific interest knowledge or any previous knowledge helps entrepreneurs to distil unusual sources of innovative ideas into potential opportunities.14 In addition to simply having a particular experience in their knowledge base, entrepreneurs must be able to learn from their experiences as well. Researcher Andrew C. Corbett has identified the importance of acquiring and transforming information, knowledge, and experience through the learning process. His research lends credence to theories about the cognitive ability of individuals to transform information into recognisable opportunities.15 How an individual entrepreneur acquires, processes and learns from prior knowledge is critical to the opportunity identification process. With that in mind, we next examine a four-step process using the most typical structural development for creativity to transform experiences into entrepreneurial insight and know-how.

Phase 1: Background or knowledge accumulation Successful creativity in our entrepreneurial context is generally preceded by investigation and information gathering. This usually involves extensive reading, conversations with others working in

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the field, attendance at professional meetings and workshops and a general absorption of information relative to the problem or issue under study. Additional investigation in both related and unrelated fields is sometimes involved. This exploration provides the individual with a variety of perspectives on the problem and it is particularly important to the entrepreneur, who needs a basic understanding of all aspects of the development of a new product, service or business venture. People practise the creative search for background knowledge in several ways. Some of the most helpful are: (1) read in a variety of fields; (2) join professional groups and associations; (3) attend professional meetings and seminars; (4) travel to new places; (5) talk to anyone and everyone about your subject; (6) scan magazines, newspapers and journals for articles related to the subject; (7) develop a subject library for future reference; (8) carry a small notebook and record useful information; and (9) devote time to pursue natural curiosities.16

Phase 2: The mind incubation process Creative individuals allow their subconscious to mull over the tremendous amounts of information they gather during the preparation phase. This incubation process often occurs while they are engaged in activities totally unrelated to the subject or problem. It happens even when they are sleeping. This accounts for the advice frequently given to a person who is frustrated by what appears to be an unsolvable problem: ‘Why don’t you sleep on it?’17 Getting away from a problem and letting the subconscious mind work on it allows creativity to spring forth. Some of the most helpful steps to induce incubation are: (1) engage in routine, ‘mindless’ activities (cutting the grass, painting the house); (2) exercise regularly; (3) play (sports, board games, puzzles); (4) think about the project or problem before falling asleep; (5) meditate or practise self-hypnosis; and (6) sit back and relax on a regular basis.18

Phase 3: The idea experience This phase of the creative process is often the most exciting. It is when the idea or solution is discovered. Sometimes referred to as the eureka factor, this phase is also the one the average person incorrectly perceives as the only component of creativity.19 As with the incubation process, new and innovative ideas often emerge while the person is busy doing something unrelated to the enterprise, venture or investigation (for example, taking a shower, driving on a highway, leafing through a newspaper).20 Sometimes the idea appears as a bolt out of the blue. In most cases, however, the answer comes to you incrementally. Slowly but surely, you begin to formulate the solution. Because it is often difficult to determine when the incubation process ends and the idea experience phase begins, many people are unaware of moving from phase 2 to phase 3. Here are some ways to speed up the idea experience: (1) daydream and fantasise about your project; (2) practise your hobbies; (3) work in a leisurely environment (for example, at home instead of the office); (4) put the problem on the back burner; (5) keep a notebook at your bedside to record late-night or early-morning ideas; and (6) take breaks while working.21

Phase 4: Evaluation and implementation This is the most difficult step of a creative endeavour and requires a great deal of courage, selfdiscipline and perseverance. Successful entrepreneurs can identify ideas that are workable and that they have the skills to implement. More important, they do not give up when they run into temporary obstacles.22 Often they will fail several times before they successfully develop their best ideas. In some cases entrepreneurs will take the idea in an entirely different direction or will discover a new and more workable idea while struggling to implement the original idea.

Chapter 6: Opportunity and the creative pursuit of innovative ideas 203

Another important part of this phase is the reworking of ideas to put them into final form. Because frequently an idea emerges from phase 3 in rough form, it needs to be modified or tested to put it in final shape. Some of the most useful suggestions for carrying out this phase are: (1) increase your energy level with proper exercise, diet and rest; (2) educate yourself in the business planning process and all facets of business; (3) test your ideas with knowledgeable people; (4) take notice of your intuitive hunches and feelings; (5) educate yourself in the selling process; (6) learn about organisational policies and practices; (7) seek advice from others (for example, friends, experts); and (8) view the problems you encounter while implementing your ideas as challenges to be overcome.23 Figure 6.6 illustrates the four phases of a creative thinking process. If you encounter a major problem while moving through the process it is sometimes helpful to go back to a previous phase and try again. For example, if an individual is unable to formulate an idea or solution (phase 3), a return to phase 1 often helps. By immersing themselves in the data, entrepreneurs allow the unconscious mind to begin anew the processing of the data, establishing cause/effect relationships and formulating potential solutions. FIGURE 6.6 A CREATIVE THINKING PROCESS

Incubation

Knowledge accumulation

Creative process

Ideas

Evaluation and implementation

ENTREPRENEURIAL IMAGINATION AND CREATIVITY To see opportunities, entrepreneurs blend imaginative and creative thinking with a systematic, logical process ability similar to that described above. This combination is a key to successful innovation. In addition, potential entrepreneurs are always looking for unique opportunities to fill needs or wants. They sense economic potential in business problems by continually asking ‘What if … ?’ or ‘Why not … ?’ They develop an ability to see, recognise and create opportunity where others only find problems. It has been said that the first rule for developing entrepreneurial vision is to recognise that problems are to solutions what demand is to supply. Applying this rule means an entrepreneur will analyse a problem from every possible angle: What is the problem? Whom does it affect? How does it affect them? What costs are involved? Can it be solved? Would the marketplace pay for a solution? This is the type of analysis that blends creative thinking with systematic analysis.24 Creativity has become a compelling topic in the popular media. Richard Florida is an academic whose field is regional economic development. He says: ‘Human creativity [is] the key factor in our

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economy and society … we now have an economy powered by human creativity. Creativity … is now the decisive source of competitive advantage’.25

THE NATURE OF THE CREATIVE PROCESS One’s creative potential is something that can be developed and improved.26 Everyone is creative to some degree. However, as is the case with many abilities and talents (for example, athletic or artistic), some individuals have a greater aptitude for creativity than others. Also, some people have been raised and educated in an environment that encouraged them to develop their creativity. They have been taught to think and act creatively. For others the process is more difficult because they have not been positively reinforced and, if they are to be creative, they must learn how to formally implement the creative process.27 Many people incorrectly believe that only a genius can be creative.28 Most people also assume some people are born creative and others are not, or only the gifted or highly intelligent person is capable of generating creative ideas and insights. Yet, the real barriers to creative thinking are sometimes the inadvertent ‘killer phrases’ we use in our communications. People may not intentionally stop a creative idea, but simple negative phrases such as, ‘that won’t work’ or ‘we’ve tried that before’ or ‘get real!’ prohibit people from thinking any further. Moreover, if you give a task requiring creativity to those ill-equipped with the knowledge or skills, restrict autonomy, constrain resources too tightly, create teams that think too much alike, punish failure rather than value the learning opportunity and generally fail to provide support, creativity will be the casualty every time.29 Creativity is not some mysterious and rare talent reserved for a select few. It is a distinct way of looking at the world that is often illogical. The creative process involves seeing relationships among things others have not seen (for example, the use of USB flash drives or memory sticks to store and transfer data between computers).30

DEVELOPING YOUR CREATIVITY That’s the dumbest thing I ever heard! On CourseMate Express read about the most common ‘idea stoppers’.

You can do several things to improve your own creative talents. Becoming aware of some of the habits and mental blocks that stifle creativity is one of the most helpful.31 Of course, as with most processes, your development will be more effective if you regularly practise exercises designed to increase your creative abilities. The following section will help you to improve your awareness of some of the thought habits that limit your creativity and to assist you in developing a personalised creativity improvement program.

Lateral thinking One of the difficulties in using the four-step creative process is the reliance on bright ideas emerging from phase 2, the mind incubation process. In recent years, creativity researchers have devised specific techniques to ‘forcibly’ generate novel ideas. Among the best-known is the lateral thinking approach developed by Edward de Bono. Lateral thinking is concerned with the generation of new ideas. It is also concerned with ‘breaking out of the concept prisons of old ideas’.32 Lateral thinking is not a substitute for vertical thinking (or thinking in a logical sequential manner). Both are required – they are complementary: lateral thinking is generative, vertical thinking is selective. For instance, during brainstorming meetings, you encourage lateral thinking throughout the first session to generate as many creative solutions as possible and vertical thinking during the second session to select the feasible ideas.

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In traditional vertical thinking (logic or mathematics), you move forward by sequential steps, each of which must be justified. You select out of only what is relevant. You must be right at each stage in order to achieve a correct solution.33 In lateral thinking, you may deliberately seek out irrelevant information – you use information not for its own sake but for its effect. You may have to be wrong at some stage in order to achieve an innovative and correct solution (see Table 6.2). TABLE 6.2

LATERAL THINKING VERSUS VERTICAL THINKING

LATERAL THINKING

VERTICAL THINKING

Changes

Chooses

Looks for what is different

Looks for what is right

Makes deliberate jumps

One thing must follow directly from another

Welcomes chance intrusions

Concentrates on relevance

Explores the least likely directions

Moves in the most likely directions

The entrepreneur needs cross-functional expertise in both types of thinking so that no new idea will be wasted. The wider the net, the greater the catch. True opportunity spotters identify opportunities laterally (through intuition and gut feeling), but they analyse them vertically (through science and commercialisation processes).

Thinking outside the box Thinking outside the box is never easy, nor is it merely a reflection of mental brightness. To leave your psychological comfort zone and explore ‘solutions in the unknown world on the outside requires large measures of mental agility, boldness and creativity – and/or a leader who makes life in the old box so uncomfortable that getting out is the only option. The future rests in those willing and able to do so’.34

Singaporean entrepreneur abducted by aliens. Chaotic, otherworldly thinking. Learn what it takes on CourseMate Express.

DEVELOPING CREATIVITY What colour is the sky when you dream? Do you consider yourself to be creative? Creativity has been defined as having the quality or power of creating. People are innately creative. Really. Let your creativity out of the playpen! Millions of dollars have been made from creative endeavours that are truly simple. You can make them too if you use some of these methods to boost your creativity. •

ENTREPRENEURSHIP IN PRACTICE

Brainstorm: This is the old-school way to drum up creative ideas and solve problems, but it is still by far the best. The corporate world was woken up when Alex Osborn introduced this concept in the 1950s. Established rules were easy to follow: – shout out or write down every solution that comes to mind – off-the-wall ideas are welcome – criticise nothing – organise later – build on every idea – even when it seems foolish or fanciful.

cont.

»

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•

•

•

•

• •

•

•

Opposites attract: Here’s an interesting concept: synectics. Similar to the word itself, synectics involves putting two nonsensical things together to see what happens. Examples: imagine a restaurant with no waiters, tables or silverware. It’s McDonald’s. Imagine a bookstore with no books – and no store. Isn’t that Amazon.com? U-Haul: moving trucks with no movers. Don’t hesitate to explore that which is strange! THINKubate: Gerald Haman created the ‘THINKubator’ – a playground where businesspeople, entrepreneurs and the like can go to escape the humdrum environment of offices and ‘can’t doers’. The playground houses comfortable seating, toys and fun pictures and overall offers an environment that favours brain stimulation and idea creation. It must work, because Haman has developed numerous products for Procter & Gamble. Trigger great ideas: Triggers are everyday items that can be used to stimulate the brain: abstract photos, inspiring quotes, uncompleted ideas, tips and so on. Place trigger items in various places you look or visit often – the refrigerator door, your dashboard, your phone. You never know when a connection will be made. Connect: Every person you meet or place you visit might be an opportunity waiting to happen. The key is to be prepared for that opportunity when it arises. Creativity consultant Jordan Ayan suggests building up your CORE: curiosity, openness, risk and energy. These traits can be enhanced by reading up on trends, attending trade shows, browsing and trying new things. Spotting open windows isn’t necessarily easy, but increasing the number of windows can be. Always celebrate failure: Try and try again. What doesn’t kill you only makes you stronger. Dare to be great! Get the idea? Don’t suffer from insanity! Enjoy every minute of it! Make ’em laugh: Humour is a great way to relieve stress. Use it in your creative endeavours. Can you imagine Dennis the Menace helping you build your prototype? How about letting the Monty Python writers co-author your business plan? Let Urkel, or even your youngest relative, in on your invention. Humour and laughter certainly encourage creativity. Sweat it: Yes! Sweat it out! Exercise gets the creative juices – endorphins – flowing. Let the mind wander while you’re jogging, or ride the exercise bike while reading the year-end reports. Just be sure to keep a notepad handy to jot down all of the great ideas. Remember your wildest dreams: Has anyone ever replied to you with this statement: ‘In your dreams!’ Well, go figure! Dreams are a great place to start when it comes to unleashing creativity. Elias Howe once had a dream in which cannibals were piercing his flesh with spears. Thus the sewing machine was invented. Don’t ignore daydreams or spur-of-the-moment ideas, either. Your subconscious could be trying to tell you something. Source: Adapted from Alto, N. D. (2000), ‘Think big’, Business Start Ups, January, 61–5. Published by Entrepreneur Media, Inc., ª 2000.

Here are some tips for challenging assumptions: • understand the problem – recognise that you and everyone else have ingrained assumptions about every situation • play a child – ask plenty of basic ‘why?’ and ‘why not?’ questions in order to discover and challenge those assumptions • play an external observer – pretend you are a complete outsider and ask questions such as: ‘Why do you do it this way at all?’ • disassemble the problem – reduce a situation to its simplest components in order to take it out of your environment • reframe – consider an issue from many different angles; restate a problem in different terms • imagine the opposite – consider what the experts and professionals advise and then consider doing the opposite.35

Recognising relationships Many inventions and innovations are a result of the inventor seeing new and different relationships among objects, processes, materials, technologies and people.36 Examples range widely and include: (1) biodegradable packaging materials made out of starch; (2) combining combustion engine technology with the wheel to create the automobile; and (3) using a winged keel on an Australian

Chapter 6: Opportunity and the creative pursuit of innovative ideas 207

yacht to break the then longest winning streak in modern sports and wrest the America’s Cup away from the Americans for the first time in 132 years. If you wish to improve your creativity it helps to look for different or unorthodox relationships among the elements and people around you. This activity involves perceiving in a relational mode. You can develop this talent by viewing things and people as existing in a complementary or appositional relationship with other things and people. Simply stated, things and people exist in the world in relation to other things and people. Creative people seem to be intuitively aware of this phenomenon and have developed a talent for recognising new and different relationships. These relationships often lead to visions that result in new ideas, products and services.37 In order to develop the ability to recognise new relationships, you must practise perceiving in a relational mode.

Using your brains Ever since split-brain studies were conducted in the 1950s and 1960s, experts on creativity, innovation and self-development have emphasised the importance of developing the skills associated with both hemispheres of the brain.38 The right brain hemisphere helps an individual understand analogies, imagine things and synthesise information. The left brain hemisphere helps the person analyse, verbalise and use rational approaches to problem solving. Although the two brain hemispheres (right and left) process information differently and are responsible for different brain activities and skills (see Table 6.3), they are integrated through a group of connecting nerve fibres called the corpus callosum. Because of this connection and the nature of the relationship between the activities of each hemisphere, each hemisphere should be viewed as existing and functioning in a complementary relationship with the other hemisphere.39 The creative process involves logical and analytical thinking in the knowledge accumulation, evaluation and implementation stages. In addition, it calls for imagination, intuition, analogy conceptualisation and synthesising in the incubation and idea-creation stages. So to become more creative it is necessary to practise and develop both right- and left-hemisphere skills. See Table 6.4 for ways to develop left- and right-hemisphere brain skills. TABLE 6.3

PROCESSES ASSOCIATED WITH THE TWO BRAIN HEMISPHERES

LEFT HEMISPHERE

RIGHT HEMISPHERE

Verbal

Non-verbal

Analytical

Synthesising

Abstract

Seeing analogies

Rational

Non-rational

Logical

Spatial

Linear

Intuitive Imaginative Source: Edwards, B. (1979). Drawing on the right side of the brain, Los Angeles: Tarcher

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TABLE 6.4

WAYS TO DEVELOP LEFT- AND RIGHT-HEMISPHERE SKILLS

LEFT-HEMISPHERE SKILLS

RIGHT-HEMISPHERE SKILLS

1 Step-by-step planning of your work and life activities

1 Using metaphors and analogies to describe things and people in your conversations and writing

2 Reading ancient, medieval and scholastic philosophy, legal cases and books on logic

2 Taking off your watch when you are not working

3 Establishing timetables for all of your activities

3 Suspending your initial judgement of ideas, new acquaintances, movies, television programs and so on

4 Using and working with a computer program

4 Recording your hunches, feelings and intuitions and calculating their accuracy 5 Detailed fantasising and visualising things and situations in the future 6 Drawing faces, caricatures and landscapes

ARENAS OF CREATIVITY On CourseMate Express read about how terrorism ignited innovation in America. Facial measurements of terrorists.

Remember, people are inherently creative. Some act on that creativity all of the time while others stifle it, and most of us fall somewhere in between the two. The reality is that people often do not recognise when or how they are being creative. Furthermore, they fail to recognise the many opportunities for creativity that arise within their jobs on a daily basis. Creativity researcher William Miller argues that people often do not recognise when they are being creative, and they frequently overlook opportunities to be creative. He suggests that the path to creativity begins by first recognising all of the ways in which we are or can be creative. People in organisations can channel their creativity into seven different arenas: • Idea creativity: thinking up a new idea or concept, such as an idea for a new product or service or a way to solve a problem. • Material creativity: inventing and building a tangible object such as a product, an advertisement, a report or a photograph. • Organisation creativity: organising people or projects and coming up with a new organisational form or approach to structuring things. Examples could include organising a project, starting a new type of venture, putting together or reorganising a work group, and changing the policies and rules of a group. • Relationship creativity: an innovative approach to achieving collaboration, cooperation and win-win relationships with others. The person who handles a difficult situation well or deals with a particular person in an especially effective manner is being creative in a relationship or one-on-one context. • Event creativity: producing an event such as an awards ceremony, team outing or annual meeting. The creativity here also encompasses de´cor, ways in which people are involved, sequence of happenings, setting and so forth. • Inner creativity: changing one’s inner self; being open to new approaches to how one does things and thinking about oneself in different ways; achieving a change of heart or finding a new perspective or way to look at things that is a significant departure from how one has traditionally looked at them.

Chapter 6: Opportunity and the creative pursuit of innovative ideas 209

• Spontaneous creativity: acting in a spontaneous or spur-of-the-moment manner, such as coming up with a witty response in a meeting, an off-the-cuff speech, a quick and simple way to settle a dispute, or an innovative appeal when trying to close a sale.40

CREATING THE RIGHT SETTING FOR CREATIVITY Creativity is most likely to occur when the business context is right. No enterprise will have creative owners and managers for long if the right context within the firm is not established and nurtured. Following are some important characteristics of what factors are important: • a trustful management that does not over-control employees • open channels of communication among all business members • considerable contact and communication with outsiders • a large variety of personality types • a willingness to accept change • an enjoyment in experimenting with new ideas • little fear of negative consequences for making a mistake • the selection and promotion of employees on the basis of merit • the use of techniques that encourage ideas, including suggestion systems and brainstorming • sufficient financial, managerial, human, and time resources for accomplishing goals.41

INNOVATION AND THE ENTREPRENEUR Innovation is a key function in the entrepreneurial process. As renowned consultant and author, Peter F. Drucker, commented: ‘Innovation is the specific function of entrepreneurship … It is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth’.42 Hindle takes it a bit further when he says that ‘innovation is the combination of an inventive process and an entrepreneurial process to create new economic value for defined stakeholders’.43 Innovation is the process by which entrepreneurs convert opportunities (ideas) into marketable solutions. It is the means by which they become catalysts for change.44 We demonstrated in the earlier parts of this chapter that the innovation process starts with a good idea. The origin of an idea is important and the role of creative thinking may be vital to that development.45 A major difference exists between an idea that arises from mere speculation and one that is the product of extended thinking, research, experience and work. More important, a prospective entrepreneur must have the desire to bring a good idea through the development stages and into the market. Therefore, innovation is a combination of the vision to create a good idea and the perseverance and dedication to remain with the concept through implementation. Importantly though, it must be perceived as value adding by the market to which it is destined. In Chapter 9 we discuss Hindle’s model of entrepreneurial process which argues that exploitation of an opportunity involves moving from commitment to pursue the opportunity to the actual achievement of value through the new venture’s business model. But for now we remain focused on what creates entrepreneurial opportunity and the relationship between opportunity and innovation.

Coaches, champions, and gatekeepers. What are the five types of innovators? Read about them on CourseMate Express.

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THE INNOVATION PROCESS On CourseMate Express read about important innovations by small firms. See what we can’t do without.

Most innovations result from a conscious, purposeful search for new opportunities.46 This process begins with the analysis of the sources of new opportunities. Drucker has noted that because innovation is both conceptual and perceptual, would-be innovators must go out and look, ask and listen. Successful innovators use both the right and left sides of their brains. They look at figures. They look at people. They analytically work out what the innovation has to be to satisfy the opportunity. Then they go out and look at potential product users to study their expectations, values and needs.47 Most successful innovations are simple and focused. They are directed towards a specific, clear and carefully designed application. In the process they create new customers and new markets. Wireless Internet is an example. Why should one be tied down to a desk when computing should be ubiquitous? One powerful theory of innovation is the idea of disruptive technology, coined by Christensen in his 1997 book The Innovator’s Dilemma.48 A disruptive technology creates a dilemma for any business firmly entrenched in a market as they confront two distinct market choices. The first choice is to continue with innovation that improves the performance of the products in the portfolio for the customers a firm already serves. The second choice is to turn towards a product category that disruptive technology makes possible for customers the business does not currently serve and which their current customers will have no interest in. The second choice is usually a lower performance or less expensive product or process that serves a seemingly less profitable market segment. If this second choice is ignored the disruptive technology is likely to be introduced into the market by some smaller or even start-up enterprise. As the new entrant gains a foothold in the low end, less demanding part of an existing market it provides opportunity for the newer firm to successively move upmarket through performance improvements until finally it displaces the market incumbents. However, technology is not the only source of this disruptive innovative behaviour. Opportunities for disruptive innovation also exist by adapting changes to a business model, reducing process costs (e.g. cheaper labour) or finding any other means of entering a lower cost product or service that extends a market to a set of customers who will be satisfied with a lower performance standard (see Table 6.5). The key idea behind disruptive TABLE 6.5

EXAMPLES OF DISRUPTIVE INNOVATION

DISRUPTIVE INNOVATION

DISPLACED OR PRESSURED PRODUCT CATEGORY

Personal computers

Mainframe computers

Smart mobile technologies

Personal computers

No-frills airlines

Full-service airlines

Digital cameras

Photographic film

Mass-market mobile telephony, EFTPOS and e-commerce

Cash registers

Boutique steel mini-mills

Vertically integrated steel mills

Wikipedia

Encyclopaedia Britannica

Tablet computers

Typewriters

Blogging

Phototypesetting and manual paste-up

Mobile or cellular telephones

Fixed line telephones

Container ships and containerisation

Cargo ships and wharf labourers

Chapter 6: Opportunity and the creative pursuit of innovative ideas 211

innovation is that established firms are predisposed to overlooking market opportunities that have lesser needs despite the fact that the under- or unserved market segment may have greater potential in terms of market expansion.

TYPES OF INNOVATION Four basic types of innovation exist (see Table 6.6). These extend from the totally new to modifications of existing products or services. In order of originality the four types are: • invention – the creation of a new product, service or process, often one that is novel or untried; such concepts tend to be revolutionary • extension – the expansion of a product, service or process already in existence; such concepts make a different application of a current idea • duplication – the replication of an already existing product, service or process; the duplication effort, however, is not simply copying but adding the entrepreneur’s own creative touch to enhance or improve the concept to beat the competition • synthesis – the combination of existing concepts and factors into a new formulation; this involves taking ideas or items already invented and finding a way so together they form a new application.49

THE MAJOR MISCONCEPTIONS OF INNOVATION The entire concept of innovation conjures up many thoughts and misconceptions; it seems that everyone has an opinion as to what innovation entails. In this section, we outline some of the commonly accepted innovation misconceptions and provide reasons why these are misconceptions and not facts.50 • Innovation is planned and predictable. This statement is based on the old concept that innovation should be left to the research and development (R&D) department under a planned format. In truth, innovation is unpredictable and may be introduced by anyone. • Technical specifications must be thoroughly prepared. This statement comes from the engineering arena, which drafts complete plans before moving on. Thorough preparation is good, but it sometimes takes too long. Quite often, it is more important to use a try/test/revise approach. • Innovation relies on dreams and blue-sky ideas. As we have demonstrated in this chapter, the creative process is extremely important to recognising innovative ideas. However, accomplished innovators are very practical people and create from opportunities grounded in reality not daydreams. • Big projects will develop better innovations than smaller ones. This statement has been proven false time and again. Larger companies are now encouraging their people to work in smaller groups where it often is easier to generate creative ideas. • Technology is the driving force of innovation success. Technology is certainly one source for innovation, but it is not the only one. As we outlined earlier in this chapter, numerous sources exist for innovative ideas; technology is certainly a driving factor in many innovations, but it is not the only success factor. Moreover, the customer or market is the driving force behind any innovation. Market-driven or customer-based innovations have the highest probability of success.

Cochlear to Woomera. Can you name Australia’s top inventions? Here they are on CourseMate Express.

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TABLE 6.6

INNOVATION IN ACTION

TYPE

DESCRIPTION

EXAMPLES

Invention

Totally new product, service or process

Wright brothers (US) – aeroplane Henry Sutton (AUS) – fax machine Thomas Edison (US) – light bulb Sir Ernest Rutherford (NZ) – atom splitting

Extension

New use or different application of an already existing product, service or process

Mervyn Victor (AUS) – lawnmower Sir Edmund Hillary (NZ) – farm tractors for ice exploration Robert Dane (AUS) – solar panel yacht sail Ray Kroc (US) – McDonald’s Bill Gallagher (NZ) – electric fence Mark Zuckerberg (US) – Facebook

Duplication

Creative replication of an existing concept

Bill Hamilton (NZ) – Hamilton Jet Boat Dean Kamen (US) – Segway Human Transporter Pizza Hut – pizza parlour John Britten (NZ) – motorcycle

Synthesis

Combination of existing concepts and factors into a new formulation or use

Howard Schultz (US) – Starbucks John Neustroski (NZ) – portable fur plucker for possums Ben Lexcen (AUS) – America’s Cup-winning winged keel design Alan Gibb (NZ) – Aquada (car on water) Paul Beckett (NZ) – Blokart (wind sailing on land)

PRINCIPLES OF INNOVATION

How to get in the flow, like playing jazz. On CourseMate Express read about the psychology of ‘optimal experience’.

On CourseMate Express read about the greatest failures in entrepreneurship history. What doomed these attractive ventures?

• Innovation principles really do exist. These principles can be learned and, when combined with opportunity, can enable individuals to innovate. The major motivation principles follow. • Be action oriented: Innovators always must be active and searching for new ideas, opportunities or sources of innovation. • Make the product, process or service simple and understandable: People must readily understand how the innovation works. • Make the product, process or service customer-based: Innovators always must keep the customer in mind. The more an innovator has the end-user in mind, the greater the chance the concept will be accepted and used. • Start small: Innovators should not attempt a project or development on a grandiose scale. They should begin small and then build and develop, allowing for planned growth and proper expansion in the right manner and at the right time. • Aim high: Innovators should aim high for success by seeking a niche in the marketplace. • Try/test/revise: Innovators always should follow the rule of try, test and revise. This helps work out any flaws in the product, process or service. • Learn from failures: Innovation does not guarantee success. More important, failures often give rise to innovations.51 • Follow a milestone schedule: Every innovator should follow a schedule that indicates milestone accomplishments. Although the project may run ahead or behind schedule, it is still important to have the schedule in order to plan and evaluate the project. • Reward heroic activity: This principle applies more to those involved in seeking and motivating others to innovate. Innovative activity should be rewarded and given the proper

Chapter 6: Opportunity and the creative pursuit of innovative ideas 213

amount of respect. This also means tolerating and, to a limited degree, accepting failures as a means of accomplishing innovation. Innovative work must be seen as heroic activity that will reveal new horizons for the enterprise. • Work, work, work: This is a simple but accurate exhortation with which to conclude the innovation principles. It takes work – not genius or mystery – to innovate successfully.52

INNOVATION IN THE ERA OF CLIMATE CHANGE Could it possibly be that climate change is the first example of irreversible large-scale environmental change caused by humankind? Enterprising people have created solutions to much else. We can protect against chemical and nuclear accidents, the spread of disease, depletion of resources, and disasters and pandemics. Today even species extinction seems correctable through emerging gene technology. Climate scientists are sceptical; they are increasingly convinced that runaway climate change might defy this history of positive innovation. Governments often place most of their attention and funding into basic research and technology development with the hope of seeing new revolutionary industries emerge. Yet amazingly, we still haven’t seen the commercial introduction of hydrogen fuel cells 160 years after they were invented. As Friedman says: … that is why we need to be constantly trying to invent new forms of abundant, clean, reliable, and cheap electrons and constantly trying to make the technologies that already exist today for producing clean electrons – solar photovoltaic, wind, solar thermal, and geothermal – more abundant, reliable, and cheap.53

There are already a myriad of wind and solar technologies that are cost-effective. Ultimately, the green revolution is going to be carried by engineers and entrepreneurs who can break down the barriers to the market and commercialise existing technologies. Notably, it may not be the entrepreneur himself or herself who invents the innovation, but it is the entrepreneur who does the hard yards, who puts in the 99 per cent perspiration to take that inspiration to the market. For clean technology, we don’t need a massive project like the Manhattan Project that produced the first atomic bomb; we need a market for clean energy. We need innovators to team up with entrepreneurs to produce and market all sorts of breakthroughs by creating and responding to demand. Only entrepreneurs can take this much innovation to the marketplace. Only entrepreneurs can generate and allocate enough capital fast enough to commercialise them. Table 6.7 indicates which innovations contributed to global warming and which could possibly promote sustainability. TABLE 6.7

INNOVATIONS THAT PROMOTED AND CAN SOLVE GLOBAL WARMING

TOP TWENTIETH-CENTURY INNOVATIONS THAT CAUSED GLOBAL WARMING

CANDIDATES FOR TOP SUSTAINABLE TWENTY-FIRSTCENTURY INNOVATIONS

Electrification; automobile; aeroplane; water supply and distribution; agricultural mechanisation; air conditioning and refrigeration; highways; household appliances; petroleum and petrochemical technologies; nuclear technologies.

Genetic engineering; artificial trees; species preservation; geo-engineering; carbon sequestration; free non-fossil fuel power systems; gene sequencing; hydrogen-powered cars; methane-fuelled rockets; smog-eating cement; waste management; weather prediction.

Sources: Adapted from ‘Greatest engineering achievements of the 20th century’, National Academy of Engineering, ª 2015; ‘Top 21st Century Innovations & Challenges’ by Bette Boomer, published by Bette Boomer, ª 2011; ‘Top 10 Technologies Of The Twenty-First Century’, published by Akorra.com, ª 2012; ‘The promises and perils of 21st century technology: An overview of the issues’ by Miller, R., Michalski, W., Stevens, B. from ‘21st Century Technologies Promises and Perils of a Dynamic Future’, OECD, ª 1998.

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Innovation in the era of climate change presents dilemmas. How can entrepreneurs continue to encourage consumption while simultaneously discouraging and warning about its perils? Milker gives some guidelines which are outlined below. • A manufacturer developing a new product should consider whether their product will offset a consumer’s general consumption needs and potentially decrease the consumer’s environmental impact. Examples could be shoes made from recycled materials, products with a lifetime warranty, or a product which is made of completely biodegradable materials. Digital examples could be creating digital goods (MP3s or audio books), services which replace traditional paper (craigslist versus yellow pages) and services promoting reuse and sale of used goods. • In its product planning a business should include methods of manufacturing and distribution which ensure a minimal environmental impact. This can be accomplished by using direct-toconsumer shipping whenever possible, by creating products for a local market which utilise local resources and by sourcing manufacturing materials locally. • Businesses should consider creating products with significantly longer life spans. While this is impractical for many products, it is also a great design challenge for entrepreneurs. By creating products which can be upgraded, retro-fitted or are simply indestructible, we can communicate to consumers the inherent environmental and cost benefits of purchasing a product which will last a generation. • Entrepreneurs should find ways to package products which are sustainable by utilising recycled and biodegradable materials for packaging while minimising packaging as much as possible. • Entrepreneurs should adopt marketing and promotional standards which are less impactful to the environment by using digital and word-of-mouth promotion. Build your brand by promoting your sustainable practices and you can stand apart. Create incentives for consumers to purchase your products which go beyond price and features, but provide value through longevity and reusability.54

CRADLE-TO-CRADLE DESIGN Cradle-to-cradle in the cradle. On CourseMate Express read about nappie innovations in Australia and New Zealand.

The challenge for entrepreneurs of this century is how to create and sell products and services that comply with economic, social and ecological sustainability. Although it may be new to entrepreneurs, sustainable design and innovation is already very present within architecture, landscape architecture, urban design, urban planning, engineering, graphic design, industrial design, interior design and fashion design. Cradle-to-cradle design is a philosophy of innovation based upon the cyclical flows of the Earth. In the natural world, one organism’s waste becomes the next organism’s nourishment. In the same way, cradle-to-cradle products virtually eliminate waste and provide the ‘nutrients’ for both nature and for the next products of industry. Every action – be it commercial, lifestyle, educational or governmental – ought to have a net positive effect on the environment. Cradle-to-cradle was first developed by Michael Braungart and William McDonough.55 They conceived products, such as biodegradable fabrics, that would be used and then be returned to nature and become food for the next product forming a closed loop. McDonough challenges us in the epigraph at the beginning of this chapter to ‘imagine a world in which everything is so intelligently designed that human activity generates a delightful, restorative ecological footprint’ (see also Chapter 3). Compostable diapers anyone? Recyclable shirts that iron themselves? How about sustainable fashion? Paper beer bottles? Sorry, they have already been invented.

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USING CROWDFUNDING TO LAUNCH A SUSTAINABLE VENTURE IDEA Simon Griffiths and co-founder of Who Gives A Crap (WGAC), Jehan Ratnatunga, met at ENTREPRENEURSHIP university while studying engineering. With second degrees in economics and computer science respectively, they had worked as engineers, bankers and strategists at companies including Morgan Stanley, Boston Consulting Group and Google. They launched their first IN PRACTICE social enterprise, Ripple.org, with friends in 2007. While at the Unreasonable Institute as part of the 2010 intake, Simon and Jehan met Danny Alexander, a product designer with a similar mind-set. Danny had spent two years at Method, designing various home products, before becoming a freelance designer. Danny’s freelance clients included IDEO, Unilever, Plum Organics and Catapult Design. He had also worked on sanitation products for the developing world, as well as a variety of fast-moving consumer goods for the US market. Simon, Jehan and Danny launched Who Gives A Crap when they learned that 2.5 billion people across the world didn’t have access to a toilet. That was roughly 40 per cent of the global population and meant that diarrhoea-related diseases filled over half of sub-Saharan African hospital beds and killed 2000 children under 5 every day. In July 2012, the three partners launched Who Gives A Crap to manufacture a toilet paper using only 100 per cent recycled post-consumer waste fibres with a crowdfunding campaign on IndieGoGo. Simon sat on a toilet in their draughty warehouse and refused to move until they had raised enough pre-orders to start production. Fifty hours and one cold bottom later, they had raised over AU$50 000. The first product was delivered in March 2013 and 50% of their profits are destined for the organisation WaterAid to build toilets and improve sanitation in the developing world. Their impact to date shows that every roll of Who Gives A Crap toilet paper is basically providing someone with access to a toilet for about one week. When it comes to flushing out poverty and saving the planet, they say they’re on a roll. They believe that the need to wipe shouldn’t mean wiping out the planet. That’s why their toilet paper is designed to save on trees, water and landfill. They don’t use any chlorine, inks, dyes or weird perfumes in their toilet paper either. They just pulp the clean fibres at super high temperatures to make WGAC biodegradable, safe in septic tanks, strong and silky soft toilet paper. They say their toilet paper is as good for your bum as it is for the planet. It is also good for those socially disadvantaged. NB: Refer to Chapter 14 for more on crowdfunding. Sources: Adapted from Who Gives a Crap, http://au.whogivesacrap.org/pages/about-us and ‘Who Gives A Crap – toilet paper that builds toilets’, IndieGoGo, Inc., ª 2015. https://www.indiegogo.com/projects/who-gives-a-crap-toilet-paper-that-builds-toilets.

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SUMMARY This chapter examined the importance of creativity and innovation to the entrepreneur. Opportunity identification was discussed in relation to ideas and the knowledge and learning needed. The sources of innovative ideas were outlined and examined, as were four models of entrepreneurial opportunity including the social model of innovation and opportunity. The creativity process was then described and ways of developing creativity were outlined. The nature of the creative climate was also presented. The process of innovation was discussed with particular reference to its disruptive nature on existing businesses and markets. The four basic types of innovation – invention, extension, duplication and synthesis – were explained. The chapter reviewed the misconceptions commonly associated with innovation, presented the major innovation principles and discussed financial support for innovation. We finished the chapter by discussing the dilemmas facing entrepreneurs in the era of climate change and the challenges to encouraging the right kind of consumption. Sustainability innovation was discussed and an interesting case study of a social and sustainable entrepreneurship venture was included. Exercises and suggestions are provided in the following sections to help the reader increase the development of their creativity.

KEY TERMS AND CONCEPTS appositional relationship arbitrage cradle-to-cradle creative process creativity duplication entrepreneurial opportunity

eureka factor extension incongruities innovation invention knowledge school of economics left brain

Review key terms with interactive flashcards

opportunity opportunity identification pain right brain social innovation sustainable design synthesis

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7

Why are ideas not necessarily an entrepreneurial opportunity? What is necessary to bridge the gap? How are prior knowledge and learning important to the recognition of opportunities? What are four major models of entrepreneurial opportunity? Explain and give an example of each. What are four major components in the creative process? What are the four steps involved in developing personal creativity? Describe at least five key elements that contribute to a creative climate. What is meant by the term innovation in simple terms and what important attributes does an innovation need in order to be an entrepreneurial opportunity? 8 What are the four major types of innovation? 9 Briefly describe each of the five major misconceptions commonly associated with innovation. 10 Identify and describe five of the innovation principles. 11 What dilemma faces entrepreneurs in the era of climate change? What are some examples of this? 12 What is the philosophy of cradle-to-cradle design and what are some examples of companies using this approach in your country?

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EXPERIENCING ENTREPRENEURSHIP Top 10 things you can do with duct tape Here’s an exercise (inspired by http://www.ducttapefashion.com and the Duct Tape Page (http://www.thorssell.net/duct.html)) where you can apply some of the things we have been learning about creativity and innovation. Duct tape is a strong, fabric-based, multipurpose adhesive tape that can be used for just about anything. It has been said that ‘duct tape holds the world together’. Here are the top 10 things you can do with it. Your task is to think of as many other uses as you can. • patch pipes under the house • cover the annoying ‘check engine’ light that won’t go out • use as a band-aid • tape all the holes in the computer case shut so the fan noise isn’t so annoying • tape an annoying person’s mouth shut • repair eyeglass frames • patch a broken cigarette • handcuff the kids as an emergency baby sitter • be sure the toilet seat never stays up (duct tape it down) • get dried cat puke out of carpeting.

EXPERIENCING ENTREPRENEURSHIP Training your thinking Analyse and elaborate on how the following pairs relate to each other in a complementary way: nut and bolt, husband and wife, chocolate cake and vanilla ice cream, grass clippings and tomato plants, athlete and coach, humanity and water, winning and losing, television and overhead projectors, and managers and production workers.

EXPERIENCING ENTREPRENEURSHIP Developing your personal creativity This exercise is designed to help you develop your personal creativity. To enhance your creativity, you should make improvements in the following areas: Worksheet template • personal development – self-discipline, self-awareness, self-confidence, improvement in energy available online level, etc. • problem-solving skills – problem recognition, etc. • mental fluency – quantity of thoughts/ideas, etc. • mental flexibility – switching gears/approaches, etc. • originality – unusual thoughts and ideas, etc. It is best to start small and work on a few things at a time. Follow the step-by-step approach listed next. Use the accompanying worksheet to help you design a personal creativity program. 1 Choose one of the five areas for improvement listed (e.g. mental fluency). 2 Establish a specific objective for this area (e.g. to increase your ability to generate logical and intuitive solutions to problems at work). 3 Decide how much time you will give to this program (e.g. three hours per week). 4 Decide how long you will work in this area (e.g. one month, two months).

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5 6 7

Decide what actions you will take and what exercises you will perform to improve in this area (e.g. sentence-creation exercises, usage ideas, meditation, suspension of initial judgements). Set up an outline of your program (i.e. day of week, time of day, place and what you will do during this time). Review your program after completion and write a similar program for another one of the five areas for improvement. PERSONAL CREATIVITY PROGRAM WORKSHEET

Area of improvement Specific objective

Number of hours per week Duration of program Actions/exercises

Outline of program Day of the week Time of day Place Actions that day

EXPERIENCING ENTREPRENEURSHIP Futures thinking A useful method for thinking about emerging opportunities is to use a futures thinking approach. You can do this by yourself or bring a small group of colleagues or friends together. In this approach you target an area of interest which then becomes your focus area and then you develop alternative scenarios around the preferred and probable futures. Some examples of focus areas are: • water • holiday travel • education • energy • food • games. Your focus should target an area in which you have an interest in starting a business. Use the focus area to concentrate your mind. A useful technique is to use the political, environmental, social and technology (PEST) dimensions as a basis for thinking about the probable and preferred futures. You may want to refine the focus area and write down the specific

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attributes about it. For instance, in the area of water you may wish to concentrate on residential drinking water or farm irrigation water. Once you are clear about your focus area you can start to work through the preferred and probable futures exercise. In this exercise you first gather information about what the probable future is for this focus based upon facts and evidence. What are the trends, what major challenges are being faced, who are the major contributors to the sector and what are they doing to influence its future direction? Concentrate on facts to project what the likely and probable future is for the focus area. After gathering and collecting the facts write a short paragraph that describes a probable future scenario. Next switch your mode of thinking and instead of reflecting on the likely future start to imagine or dream what future you would prefer to create for the focus area. What are your hopes and ideals for this focus? Paint the future as you would like to see it rather than what you project it might be based on the evidence and current trajectory. From this hopeful perspective construct a scenario that describes the preferred future. Now by contrasting these scenarios imagine and identify the opportunities that exist for you to intervene between these futures and create products and/or services that will alter the course of the probable and lead you closer to the preferred. List them and write a short description of each. Congratulations! You have taken a big first step towards recognising an innovative idea.

CASE STUDIES CASE 6.1 Interface Asia–Pacific Interface Ltd, a carpet company, has emerged as perhaps the most cited example of a sustainable company in the world. It has replaced petrochemical fibres with corn-based biomass that is certified climate-neutral and the carpet tiles can be returned to Interface for the next customer (see also Case 3.1). It wasn’t always the case. In the mid-1990s, their factories and suppliers consumed around 1.2 billion pounds of material. The company’s technology [was] plundering the earth. Rob Coombs, Asia–Pacific President of Interface, summarises what has driven the company in our region: The business world is slowly coming to the realisation that it needs to develop practices sympathetic with the natural environment in which it operates. The slumbering giant is beginning to understand that there are also a range of stakeholders affected by business practices and that there is a social contract that needs to be rethought and redeveloped. This awakening brings with it many pressures; the need to rethink age-old values and approaches to problems, the need to find solutions to previously unapproached technical barriers, and the need to create a new set of decision-making criteria. For Interface, in the Asia–Pacific region, the evolution of sustainable business practice has created another challenge: How to play an important part in the process of becoming a sustainable business within a large organisation at the leading edge of the debate? How to support the position for which the company is known globally and how to live up to the position on a local basis? With a vision to become sustainable and then restorative through the power of its influence by 2020, Interface has already established a clear measure of business success. It is moving towards this goal through the adoption of a strategy on seven fronts: eliminating waste, using only renewable energy sources, creating only benign emissions, closing the product loop, energy efficient transport, energising people and changing the nature of commerce itself. Asia–Pacific represents 5 per cent of global Interface revenues and although the region is seen as a growth engine for the business, the relatively small scale of the division creates a series of challenges around the move to sustainability. How has Asia–Pacific embraced the philosophy and what has it done to support it? What are the challenges faced by a small division of a leading force in sustainable business development? For example, Japan has embraced, by necessity, the concept of recycling as a noble activity and it is promoted by government and within the business community. Therefore, Interface is engaged in a wide range of activity in Japan around this issue, while discussion around renewable energy receives much less attention. The two countries across the region that appear most engaged are Japan and Australia. In most other countries, sustainability remains a very low priority and Interface operates with less external stimulus. The stimulus from customers

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for more sustainable solutions is the greatest driver we have. With this less evident, Interface operates in a vacuum. In both our Australian and Thailand manufacturing facilities, Interface has reduced dramatically all forms of process and material waste. In Australia, for example, waste per unit of production has reduced by 90 per cent since 1996, an achievement that has both funded other sustainability projects and helped to deliver greatly improved business performance. The waste effort has been driven in both facilities by people working in teams at operator level with strong supervisor leadership. It is very much a grassroots program to reduce the company’s environmental footprint. Equally, regional success in reducing harmful emissions has been encouraging. Since 1999 our annual greenhouse gas emissions have reduced from approximately 1650 metric tons of CO2 to 1450 metric tons, while at the same time we have increased our production throughput by 35 per cent. The source of these emissions is electricity production 63 per cent (indirect contribution) and the burning of natural gas 37 per cent (direct production). We have reduced and rationalised the use of solvents at our production facilities and even gone to the extent of identifying new cleaners with less solvent emissions for our Carpet Spot Cleaning Kits, admittedly a small component, but significant in the message we are trying to put out into the marketplace. In the short term we are evaluating the sale and use of ‘climate neutral’ products and services. Source: Copyright ª 2004 from ‘The natural advantage of nations: Business opportunities, innovation and governance in the 21st century’ by Karlson Hargroves and Michael Harrison Smith. Copyright ª 2004 Taylor & Francis Books. Reprduced by permission of Taylor & Francis Books UK.

QUESTIONS

1 2 3

How does Interface demonstrate that competitive advantage and sustainability are not mutually exclusive? What system of complementary activities contribute to Interface’s competitiveness? Which other Asia–Pacific countries would be the next candidates for Interface’s sales team?

CASE 6.2 Creativity is not just for start-up ideas

Serial Entrepreneur, author and founder of the Entreprenaissance Movement, Creel Price, recounts a time when creativity was needed to fake it to make it. Within months of opening our marketing business, yet without a client, we secured the opportunity to pitch to one of the major Australian banks. After a well-received presentation in their office, they indicated we could have their business but first they wanted to check out our operation. We had 18 hours to miraculously convert our exhausted, dishevelled office into something that could even remotely back up our loose-lipped assertion of ‘state of the art’. We needed a makeover. . .fast! A plan that has since been dubbed ‘Operation Hollywood Set’ was swung into action. We couldn’t pass up the opportunity for our two-bit company to achieve a major bank as a client, so we decided to roll the dice and spend every last remaining dollar to hire all the furniture and technology we needed to look huge. We’d either get rich, or go broke. Delegating the tasks, we sent someone to buy second-hand computer monitors for all the desks. This way we’d at least look like we had a technology-enabled business, albeit we hoped they wouldn’t notice there were no hard drives attached. Someone else started hiring enough temporary staff to create the buzzing atmosphere of a thriving business. Next, we had to make the place look less drab and dingy. Someone was assigned to hire plants and paintings to take the bank team’s eyes away from the holes in the carpet and the tangle of cables dangling down everywhere. Our masterstroke was commandeering the vacant office next door and turning it into ‘our boardroom’. A huge, shiny new mahogany-coloured table and plush black leather chairs were ordered for the day and my grandfather’s battered old dining table was relegated to the scrap heap. The next day, our adrenalin levels were off the charts. You could smell the electric excitement in the air. Van after van after van arrived to deliver our props and we felt like the directors of a blockbuster movie about to start filming. With our set ready and our extras in place, all we needed now were the stars – our prospective client team. Welcoming them into our ‘call centre’, the illusion looked perfect. And with the confidence it gave us, we secured the deal. It took us a few years to fess up to our client that we had conducted ‘Operation Hollywood Set’ in their honour. He responded without surprise: ‘I figured as much because the next time I turned up to your office the cool furniture had disappeared!’

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Yet, putting our best foot forward had worked for both of us. We helped our client build a significant client segment over a decade and they morphed into a twenty-million-dollar-a-year client for us. In business, it’s times like these – when you back yourself and gamble everything on one roll of the dice – that become your fondest memories. Yes, we used a hell of a lot of front to win a client, but we had complete confidence in our ability to deliver a fantastic job providing they didn’t judge us merely on our looks. Now with more grey hair than youthful enthusiasm, I think the key to ‘faking it until you make it’ is much more than staying within the lines of the law. There is a moral code in business that must be obeyed so that you can build a brand and culture that has lasting integrity. For me, the key is to satisfy the self-mirror test. If you are confronted with an opportunity to express some overzealous front, first look yourself in the mirror and only proceed if you can be sure that you will have respect for the person who looks back at you now, as well as in the future. QUESTIONS

1 2 3 4

What model of opportunity was this venture following and what was creative and innovative about their actions? What would define the creativity in this case as lateral thinking? What arenas of creativity are exhibited in this case? Is this case creative or just plain deceptive? Justify your answer and discuss any ethical dilemma. Source: Creel Price (2014), ‘Fake it ‘til you make it: How far is too far?’, Copyright ª 2014 by Creel Price. Used by permission.

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES creative teams entrepreneurial opportunity 1

2

3

future thinking

Locate the article ‘Outlook 2015: Top trends and forecasts for the decade ahead’ in The Futurist, 48(6) (November– December 2014). After reading it, assemble a group and utilising some of the creativity techniques discussed in this chapter formulate a set of opportunities that may emerge from a chosen trend or forecast. Find and read the brief article titled ‘Living laboratory to show us the future’ by James Bow in the Alternatives Journal, 30(5) (November–December 2004), 18. Conduct research on an activity in your local region that offers an opportunity for you to get involved in similar discussions and dialogue. How would you go about starting your own forum to promote better futures for your community? Locate the article by David Magellan Horth and Charles J. Palus, ‘Using visuals to build teams’, TþD (October 2003), 59, which describes a unique technique to get a team to think and work creatively together. How can you apply this technique to develop creative and collaborative teamwork while building your own venture or in what ways can you adapt this approach to assist you in building creative teams?

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ENDNOTES 1 Drucker, P. F. (1985). Innovation and entrepreneurship. London: Pan Books Ltd (in association with William Heinemann Ltd), 33. 2 Copyright ª 2004 from ‘The natural advantage of nations: Business opportunities, innovation and governance in the 21st century’ by Karlson Hargroves and Michael Harrison Smith. Copyright ª 2004 Taylor & Francis Books. Reprduced by permission of Taylor & Francis Books UK. 3 Venkataraman, S. (1997). The distinctive domain of entrepreneurship research. In J. A. Katz (ed.), Advances in entrepreneurship, firm emergence, and growth, 3, Greenwich, CT: JAI Press, 119–38. 4 Gaglio, C. M. & Katz, J. A. (2001). The psychological basis of opportunity identification: Entrepreneurial alertness. Journal of Small Business Economics, 16, 11–95; see also Shepherd, D. A. & DeTienne, D. (2005). Prior knowledge, potential financial reward, and opportunity identification. Entrepreneurship Theory and Practice, 29(1), January, 91–112. 5 Johannessen, J-A., Olsen, B. & Lumpkin, G. T. (2001). Innovation as newness: What is new, how new, and new to whom? European Journal of Innovation Management, 4(1), 20–31. 6 Schumpeter, J. A. (1961). The theory of economic development. Cambridge, MA: Harvard University Press [1934]. 7 La Pira, F. & Gillin, M. (2006). Nonlocal intuition: Developing electrophysiological measures for decisionmaking serial entrepreneurs. In Regional frontiers of entrepreneurship research 2006 (Murray Gillin, ed.). Melbourne: Australian Graduate School of Entrepreneurship, 619–35, http:// researchbank.swinburne.edu.au/vital/ access/manager/Repository/swin:16410; Tomasino, D. (2007). The psychophysiological basis of creativity and intuition: Accessing ‘the zone’ of entrepreneurship. International Journal of Entrepreneurship and Small Business, 4(5), 528–42. 8 Two excellent biographies of Howard Florey of Adelaide are G. Macfarlane, Howard Florey (Oxford, 1979); T. I. Williams, Howard Florey (Oxford, 1984). 9 In jeanyveshuwart, ‘The Sony PlayStation: An intrapreneurship story’. Intrapreneurship Conference. Available at http:// www.intrapreneurshipconference.com/

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the-sony-playstation-anintrapreneurship-story; The Official Playstation Museum (2015). Playstation history overview. Available at http:// playstationmuseum.com/history. 10 Gaglio, C. M. (2004). The role of mental simulations and counterfactual thinking in the opportunity recognition process. Entrepreneurship Theory and Practice, Winter, 533–52. 11 Refer Schumpeter (1961) [1934]. 12 He´bert, R. F. & Link, A. N. (2009). A history of entrepreneurship. New York: Routledge. 13 Phills, J. A. Jr, Deiglmeier, K. & Miller, D. T. (2008). Rediscovering social innovation. Stanford Social Innovation Review, 6(4), 35; see also Goldsmith, S., Georges, G. & Burke, T. G. (2010). The power of social innovation: How civic entrepreneurs ignite community networks for good. Hoboken, NJ: Jossey-Bass; Bornstein, D. & Davis, S. (2010). Social entrepreneurship: What everyone needs to know. New York, NY: Oxford University Press; Yunus, M. (2010). Building social business: The new kind of capitalism that serves humanity’s most pressing needs. New York, NY: PublicAffairs. 14 A. Ardichvili, R. Cardozo, & S. Ray. A theory of entrepreneurial opportunity identification and development. Journal of Business Venturing, 18(1) (2003), 105–23; Andranik Tumasjan & Reiner Braun. In the eye of the beholder: How regulatory focus and self-efficacy interact in influencing opportunity recognition. Journal of Business Venturing, 27(6) (2012), 622–36; and Dean A., Shepherd, J. Michael Haynie & Jeffery S. McMullen. Confirmatory search as a useful heuristic? Testing the veracity of entrepreneurial conjectures. Journal of Business Venturing, 27(6) (2012), 637–51. 15 Andrew C. Corbett. Experiential learning within the process of opportunity identification and exploitation. Entrepreneurship Theory and Practice, 29(4) (2005), 473–91; and Andrew C. Corbett. Learning asymmetries and the discovery of entrepreneurial opportunities. Journal of Business Venturing, 22(1) (2007), 97–118. 16 For a discussion of the development of creativity, see Raudsepp, E. (1981). How creative are you? New York: Perigee Books; Van Gundy, A. B. (1983). 108 ways to get a bright idea and increase your creative potential. Englewood Cliffs, NJ: Prentice-Hall; and Firestien, R. L.

(1989). Why didn’t I think of that? Buffalo, NY: United Education Services Inc. 17 Nosanchuk, T. A., Ogrodnik, J. A. & Henigan, T. (1988). A preliminary investigation of incubation in short story writing. Journal of Creative Behavior, 22(4), 279–80 (this study reported that an eight-day incubation period was associated with significantly elevated story-writing creativity). 18 Harman, W. W. & Rheingold, H. (1984). Higher creativity: Liberating the unconscious for breakthrough insights. Los Angeles: Tarcher; Goleman, D., Kaufman, P. & Ray, M. (1993). The creative spirit. New York: Penguin Books. 19 See Conrath, J. (1985). Developing more powerful ideas. Supervisory Management, March, 2–9; Shekerjian, D. (1990). Uncommon genius: How great ideas are born. New York: Viking Press; Keng L. Siau. (1996). Group creativity and technology. Journal of Creative Behavior, 29(3), pp. 201–16. 20 Funk, D. (1995). I was showering when … Baltimore Business Journal, 12(46), March, 13–14. 21 For more on idea development, see Osborn, A. F. (1963). Applied imagination (3rd edn). New York: Scribners; Gordon, W. J. (1961). Synectics. New York: Harper & Row; Pollock, T. (1995). A personal file of stimulating ideas, little-known facts and daily problem-solvers. Supervision, 4, April, 24; Adams, J. (2001). Conceptual blockbusting: A guide to better ideas. Perseus Publishing; de Bono, E. (1970). Lateral thinking: Creativity step by step. New York: Perennial. 22 Rosenman, M. F. (1988). Serendipity and scientific discovery. Journal of Creative Behavior, 22(2), 132–8. 23 For more on implementation, see Keil, J. M. (1985). The creative mystique: How to manage it, nurture it and make it pay. New York: Wiley; Brandowski, J. F. (1990). Corporate imagination plus: Five steps to translating innovative strategies into action. New York: The Free Press. 24 Fernald, L. W. Jr. (1988). The underlying relationship between creativity, innovation, and entrepreneurship. Journal of Creative Behavior, 22(3), 196–202; Ward, T. B. (2004). Cognition, creativity, and entrepreneurship. Journal of Business Venturing, 19(2), March, 173–88; Michael M. Gielnik, Michael Frese, Johanna M. Graf & Anna Kampschulte. Creativity in

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the opportunity identification process and the moderating effect of diversity of information. Journal of Business Venturing, 27(5) (2012): 559–76. 25 Florida, R. (2004). The rise of the creative class: And how it’s transforming work, leisure, community and everyday life. New York: Basic Books, 5. 26 See de Bono, E. (1992). Serious creativity: Using the power of creativity to create new ideas. New York: Harper Business; Scott, G., Leritz, L. E. & Mumford, M. D. (2004). The effectiveness of creativity training: A quantitative review. Creativity Research Journal, 16(4), 361–88. 27 Mellow, E. (1996). The two conditions view of creativity. Journal of Creative Behavior, 30(2), 126–43; Anit Somech & Anat Drach-Zahavy. (2011) Overcoming resistance to change and enhancing creative performance. Journal of Management. 28 Eysenck, H. J. (1995). Genius: The nature of creativity. New York: Cambridge University Press; Taylor, B. (1995). Into the open: Reflections on genius and modernity. New York: New York University Press. 29 Amabile, T. (1998). How to kill creativity. Harvard Business Review, 76, September/October, 77–87. 30 See Dauten, D. (1986). Taking chances: Lessons in putting passion and creativity in your work life. New York: New Market Press; Dimo Dimov. Grappling with the unbearable elusiveness of entrepreneurial opportunities. Entrepreneurship Theory and Practice, 35(1) (2011), 57–81. 31 Wajec, J. (1995). Five star minds: Recipes to stimulate your creativity and imagination. New York: Doubleday; Barron, F. (1995). No rootless flower: An ecology of creativity. New Jersey: Hampton Press, Inc. 32 De Bono, Lateral thinking, 1970. 33 Vadim Kotelnikov, Lateral thinking, http://www.1000ventures.com/ business_guide/crosscuttings/ thinking_lateral.html. 34 Sentell, G. D. (2003). Thinking outside the comfort zone, cited in Vadim Kotelnikov, ‘Thinking outside the box’,

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http://www.1000ventures.com/ business_guide/crosscuttings/ thinking_outside-the-box.html 35 Sloan, P. (2003). The leader’s guide to lateral thinking skills: Powerful problemsolving techniques to ignite your team’s potential. London: Kogan Page, cited in Kotelnikov. 36 See Dauten, D. (1986). Taking chances: Lessons in putting passion and creativity into your work life. New York: Newmarket Press; Davis, G. A. (1986). Creativity is forever. Dubuque, IA: Kendall/Hunt. 37 Parnes, S. J. (1988). Visionizing: Stateof-the-art processes for encouraging innovative excellence. East Aurora, NY: DOK. 38 Buzan, T. (1984). Make the most of your mind. New York: Simon & Schuster. 39 Agor, W. H. (1984). Intuitive management: Integrating left and right brain management skills. Englewood Cliffs, NJ: Prentice-Hall; Buzan, T. (1995). Using both sides of your brain. New York: Dutton; Hall, D. (1995). Jump start your brain. New York: Warner Books. 40 William C. Miller (1999). Flash of brilliance. Reading, PA: Perseus Books. 41 Karl Albrecht (1987). The creative corporation. Homewood, IL: Dow JonesIrwin; see also William C. Miller. (1987) The creative edge: Fostering innovation where you work. New York: AddisonWesley; K. Mark Weaver. Developing and implementing entrepreneurial cultures. Journal of Creative Behavior, 22(3) (1988), 184–95; American Management Association, (1995) Creative edge: How corporations support creativity and innovation. New York: AMA; D. Leonard & S. Straus. Putting the company’s whole brain to work. Harvard Business Review, 75 (July/August 1997), 111–21; and J. Hirshberg. (1998) The creative priority. New York: Harper & Row. 42 Drucker, P. F. (1985). Innovation and entrepreneurship. New York: Harper & Row, 20. 43 Hindle, K. (2009). The relationship between innovation and entrepreneurship: Easy definition, hard policy. Regional Frontiers of Entrepreneurship Research 2009, Proceedings of the 6th AGSE

International Entrepreneurship Research Exchange, 3–6 February, University of Adelaide, South Australia. 44 Howell, J. M. & Higgins, C. A. (1990). Champions of change: Identifying, understanding, and supporting champions of technological innovations. Organizational Dynamics, Summer, 40–55; see also Schroeder, D. M. (1990). A dynamic perspective on the impact of process innovation upon competitive strategies. Strategic Management Journal, 11, 25–41. 45 Drucker, P. F. (1985). The discipline of innovation. Harvard Business Review, May/June, 67–72. 46 See Josty, P. L. (1990). A tentative model of the innovation process. R&D Management, January, 35–44. 47 Drucker, The discipline of innovation. 48 Christensen, C. M. (2003). The innovator’s dilemma. New York: HarperBusiness. See also Dvorak, J. C. The myth of disruptive technology, http:// www.pcmag.com. 49 Adapted from Hodgetts, R. M. & Kuratko, D. F. (2001). Effective small business management (7th edn). Fort Worth, TX: Harcourt College Publishers, 21–3. 50 Adapted from Drucker. Innovation and entrepreneurship; Peters, T. J. & Austin, N. J. (1985). A passion for excellence. New York: Random House. 51 For a good example, see Mitsch, R. A. (1990). Three roads to innovation. Journal of Business Strategy, September/October, 18–21. 52 Taylor, W. (1990). The business of innovation. Harvard Business Review, March/April, 97–106. 53 Friedman, T. L. (2008). Hot, flat and crowded: Why we need a green revolution – and how it can renew America. Farrar, Straus and Giroux, 188–9. 54 Milker, M. C. (2008). The sustainable entrepreneur’s dilemma. Ecopreneurist, 18 October, http://ecopreneurist.com/2008/ 10/18/the-sustainable-entrepreneursdilemma/comment-page-1. 55 McDonough, W. & Braungart, M. (2002). Cradle to cradle: Remaking the way we make things. New York: North Point Press.

» CHAPTER SEVEN ENTREPRENEURIAL FAMILIES: SUCCESSION AND CONTINUITY CHAPTER OBJECTIVES

1 Rich father, noble son, poor grandson (Brazil) Wealth never survives three generations (China) Father merchant, son gentleman, grandson beggar (Mexico) From the stables to the stars and back to the stables (Italy) Shirtsleeves to shirtsleeves in three generations (USA) Multicultural aphorisms describing how most family businesses fail by the third generation.1

To describe the importance of family businesses in the Asia–Pacific and their unique problems

2 To discuss the concept of transgenerational entrepreneurship and its differences in mind-set and context 3 To explore the unique types of family capital 4 To examine some of the hallmarks of family entrepreneurship across our region 5 To depict family entrepreneurship as three sometimes conflicting but overlapping systems 6 To explore the ways that climate change and family entrepreneurship may be interrelated 7 To examine the problems as well as the key factors in management succession 8 To explain the steps involved in carrying out a succession plan 9 To understand the contextual aspects toward developing a succession strategy 10 To examine the harvest strategy for reaping the value of family business through trade sale

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Chapter 7: Entrepreneurial families: succession and continuity 225

ENTREPRENEURSHIP ACROSS THE GENERATIONS IN THE ASIA–PACIFIC In Chapter 5, ‘Pathways to entrepreneurial ventures’, we looked at many potential pathways that new venturers typically take. In Chapter 6, the creative idea pathway was explored. Later in Chapter 8, ‘Developing entrepreneurship within organisations’, we will examine how entrepreneurs can succeed in large organisations. For now, the pathway to entrepreneurship that we will investigate is through the family. For many, the family kitchen is where new business ideas get baked, because the birthplace of entrepreneurial ventures is often right in the home. Families are actually the dominant business form worldwide. They play a leading role in the social and economic wealth creation of communities and countries. Contrary to misperceptions, family businesses are not limited to small ‘mum and dad’ operations. Some of the world’s biggest and best-known companies are actually family-owned, including Wal-Mart (USA), L’Oreal (France), Benetton (Italy), Siemens (Germany), Ikea (Sweden), Lego (Denmark), Samsung Group (Korea), Tata Group (India), Foxconn (Taiwan) and Kikkoman (Japan). Entrepreneurial families are dynamic creatures that transmit their company culture through family member interactions. They are focused on entrepreneurial objectives or motives (compared to most family businesses that simply want a steady income). They also are more resilient, and they survived the recent global financial crisis (GFC) better than businesses that do not have family ownership (perhaps because they can better absorb misery!). As you consider your entrepreneurial future, you might be asking yourself whether you are ready to become a successor in your own family business. Or, whether you would rather found your own company. Either way, research shows that many entrepreneurs have self-employed parents who act as intimate role models influencing their children’s likelihood of pursuing an entrepreneurial career. Those raised in the family business, have been closely exposed to the challenges and opportunities related to an entrepreneurial career. Of course, the broader national and cultural context makes a big difference too in whether you realise your dreams. Zellweger and colleagues showed that New Zealand, given its high rate of entrepreneurial start-ups, stands out with a strong preference for entrepreneurs to found their own businesses rather than taking over their family’s.2 Germans and Japanese are generally just the opposite; the tradition there is to work for someone else. What factors lead to transgenerational entrepreneurship?3 We often hear about the role of supportive parents, but parental influence over the occupational choice of children generally lessens as their children grow older and are influenced at later ages by other factors outside the family environment. Parents have the most influence over their children during early childhood through both parenting and genetic inheritance. Children then become socially conditioned and they start to pick up the values of their socioeconomic class. During childhood, children are heavily influenced by fantasy and may develop aspirations for fantasy occupations like an astronaut, fireman, oceanographer, pilot, train driver or policeman, rather than wanting to directly mirror their father or mother’s occupation. Exposure to entrepreneurship within the family may not be enough for a child to learn the tacit knowledge necessary to be successfully self-employed. Figure 7.1 shows the probable influences of parents and family upon their children’s career choices.4

On CourseMate Express read how one Indian family has dominated industry for many generations.

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FIGURE 7.1 THE PROBABLE INFLUENCES OF PARENTS AND FAMILY UPON THEIR CHILDREN’S CAREER CHOICES

Self employment Fantasy occupations

Career interests Feelings about current work and family situation

• Father’s occupation • Parents’ education • Parents’ wealth • Siblings (birth order) • Relationship with parents

Genetic inheritance

Interests

Childhood

Goals and aspirations

Feelings about parents’ occupations

Marital status and level of support

Number of children

Education, peers and environment

Life style

Adolescence

Adult life

Source: Hunter, M. (2012). Opportunity, strategy and entrepreneurship. Introduction, the nature of opportunity, time and space, the vision platform, and making connections (Vol. 1), Nova Publishers. Copyright ª by Murray Hunter. Used by permission.

How are ownership and leadership transferred from one generation to the next? We call this succession. Let’s first recall our previous discussions of how entrepreneurial mind-sets (see Chapters 2 and 6) are developed across time and generations within the same family.5 Often, the founding entrepreneur (the patriarch or matriarch) once had an innovation, but his or her successors simply continue to maximise this existing product or service without innovating something new. Other families are serial entrepreneurs who create new streams of value across generations. How does the ‘founding father’ or ‘founding mother’ transmit his or her entrepreneurial zeal, spirit, attitudes, values and beliefs about being entrepreneurial to their children? Many things shape the quality of a family business, especially the nature of the marriage, whether family members are disengaged or enmeshed in the business, the distribution of authority between spouses, and the relationship with extended family. Entrepreneurs and their spouses are typically driven by a powerful dream that affects the way they bring up their children. It is a rocky road, but when done correctly, the family is perhaps ‘the most reliable of all social structures for transmitting cultural values and practices across generations’.6 Yet it is always a challenge to transition from the individualistic quest of the founders to the team effort of the sibling or offspring partnership. At the core, these businesses enjoy what is called ‘familiness’, that distinctive bundle of resources originating from the ‘interaction between the family, its individual members, and the business’ to ensure the company’s continuity across generations.7 Transgenerational entrepreneurship consists of five elements: (1) a focus on the family as the entrepreneurial engine; (2) the entrepreneurial mind-set of the family (entrepreneurial orientation); (3) the family’s influence on company resources (familiness); (4) contextual factors like industry, community culture, family life stage and family involvement; and (5) entrepreneurial, financial and social performance (see Figure 7.2).

Chapter 7: Entrepreneurial families: succession and continuity 227

Family life stage Family involvement

Industry

Community culture

Environment

FIGURE 7.2 FAMILY ENTREPRENEURSHIP FRAMEWORK

Entrepreneurial orientation • autonomy • risk taking • innovativeness • proactiveness • aggressiveness

Familiness: resources and capabilities • financial • human • physical • social • knowledge • cultural • intangible

Performance • entrepreneurial • financial • social

Transgenerational potential

Source: Sieger, P., Nason, R., Pramodita, S. & Zellweger, T. (2011). STEP Global Booklet. STEP Summit Reports and Resources. Paper 5, STEP Summit Reports and resources. Paper 5. Copyright ª 2011 by Babson College. Used by permission.

TYPES OF FAMILY CAPITAL What does a family bring to the table compared to other forms of business? In the first instance, it is unique kinds of family capital consisting of resources within the family that can be made available to the business.8 • Family social capital distinguishes family from non-family businesses. Non-family businesses can hire in the human resources they need, and they obtain financial resources from banks and other lenders. In contrast, family social capital cannot be hired in; it exists solely within family relationships. • Family human capital includes individual family member knowledge, experience, ability and energy that can be made available to the business. Unique to family companies, stocks of family human capital can be made available to business, family and governance systems, allowing resources to flow where needed. • Family financial capital is when family members make personal loans or gifts to other family members for a variety of reasons, including developing or sustaining a business. When the family has a good reputation, even more financial resources may be available from institutions and individuals outside the family.9 • Family emotional capital is something rare among businesses. Family members put a high priority on emotional capital – the family success that unites them through consecutive generations.

THE SPECTRUM OF FAMILY BUSINESS ACROSS THE ASIA–PACIFIC REGION More than 70 per cent of Asian firms are family-owned.10 Family businesses have been a crucial source of wealth creation in Asia and are an important pillar of the region’s economies.11 Across Asian markets, family businesses account for around 50 per cent of all listed companies and 32 per cent of total market capitalisation. Led by China, Malaysia, Singapore and South Korea, in 2011

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family businesses delivered 261 per cent cumulative total return and compound annual growth rate of 13.7 per cent, exceeding local benchmarks. Asian family businesses represent about 50 per cent of all listed companies in the region. In terms of regional distribution, the study finds higher concentration of family businesses in south Asia, at 65 per cent of total number of listed companies, compared with 37 per cent in north Asia. India is home of the largest number of family businesses, accounting for 67 per cent of all listed companies, while Chinese family businesses account for the lowest percentage (13 per cent) due to China’s state-owned economic structure. Family businesses account for 63 per cent of listed companies in Singapore. Let’s have a quick look around the region. • Australia: At least half of all firms in Australia are family businesses. Many were established after the Second World War and continue today in all industry sectors. Two-thirds of the smalland medium-sized enterprises (SMEs) sector are run by families. They may have been entrepreneurs at first, but then the entrepreneurial activity declined over time. Most Australian family businesses do not survive the first generation because of failure to run them on a business basis and failure to handle the transition to the next generation. A huge number of family businesses were started between 1945 and 1960. These proprietors are ageing and control is now passing to the second generation. In Australia, for example, only 58 per cent of all small business operators are aged between 30 and 50 inclusive. Thirty-three per cent of small business operators are aged over 50.12 • India: Family businesses are an honourable tradition in India, but have been particularly important since Independence in 1947. More than half of the firms listed in the National Stock Exchange are family businesses. After the liberalisation of the economy in the early 1990s, Indian family businesses were forced to restructure themselves to become more competitive. A new generation of Indian family entrepreneurs then emerged to take advantage of their superior access to resources and tolerance of risk. Professionalisation of the businesses (training of younger members and bringing in of outsiders) is particularly hard because of the changes required both in the mind-set of family executives and in their acceptance within the organisation. Nonetheless, India’s supercharged transformation in recent years is powered to a great extent by its entrepreneurial families. • China: Feudalism and revolution have greatly hindered family businesses in China and contributed to their low status. In the haste to catch up, particularly with Taiwan and Hong Kong, Chinese families are affected by traditional values and tend to conceal their family background out of fear of stigma. Weaknesses such as nepotism and infighting are played up and ridiculed in the press. There is a perception that family businesses are small, unprofessional and backward. Chinese business school education largely overlooks them. Those that do prosper are held together in a pyramidal structure characterised by crony capitalism, shareholder exploitation and political kickbacks.13 • Hong Kong: It is not uncommon for patriarchs to find their next generations (NextGens) to be falling behind the founders’ expectations in continuing the legacy of business families. Meanwhile, NextGens aspiring to grow new businesses under the family umbrella also find it hard to roll out their own plans and dreams. One option used in Hong Kong is called family portfolio entrepreneurship, which means the development of multiple entrepreneurial interests. • Malaysia: For Malaysians, what is important is the relationship between familiness and performance outcomes. Family leadership and culture that is strong and consistent across generations are the key factors driving the performance of these companies. Family leadership and instilling entrepreneurial culture to the next generation are key factors for longevity.

Chapter 7: Entrepreneurial families: succession and continuity 229

Nonetheless, Malaysian family businesses have problems with family governance and ownership. • Taiwan: In Taiwan, family-owned enterprises sustain competitive advantage from generation to generation by developing innovation capability. Family businesses in different life-cycle stage and size need to develop the different types of synergy between family and organisational social capital in order to accumulate innovation capabilities. The larger and the later in the life cycle a family business is, the more likely the need to develop institutional arrangements to attract non-family business professionals in the field of innovation.14

THIRTEEN-HUNDRED-YEAR-OLD FAMILY BUSINESS: SUCCESSION SECRETS The Hoshi Ryokan, a traditional Japanese inn, has been managed by the Hoshi family since it ENTREPRENEURIAL was established in AD 718, making it the world’s oldest independent family firm. The inn is currently in the hands of the 46th generation of Hoshis, with Zengoro Hoshi at the helm, who is preparing to hand over the reins to his grandson, after the unfortunate death EDGE of his eldest son. This handover will bring the Hoshi Ryokan into its 48th generation of Hoshi family ownership. The Hoshi family credit the longevity of the business to following clear cut succession rules with each passing generation, as well as instilling the simple business motto in each new generation of ‘study the water running down a small current’. Zengoro explains that this refers to the ideology of being like that small but powerful stream of water that focuses on removing each small obstacle out of its path as it moves along to improve the stream in the end. In order to bypass any conflicts or confusion that could arise from the family growing larger and more diverse with every generation, the Hoshis have instituted the strict rule that the family business is to be passed onto the eldest son of each generation. This ensures that every member knows, long before succession needs to happen, who the next owner of the inn is to be. If there is no eldest son, then a son-in-law is chosen to take the helm, who is then adopted into the family so that the family name is still preserved. This practice also allows the family to bring in new talented blood through arranged marriages. The succession of the family business is taken very seriously within the Hoshi family, which is why the Hoshi name, along with the family wealth, is only given to the family member inheriting the family business. This practice allows the family to shuffle non-selected children to other family names, as well as easing the adoption process of an heir who has married into the family. This may seem unfair by modern standards, but this strict protocol has ensured the success of the business for over 1300 years. The strong set of values, as well as the evaluation of the business assets before each succession, has allowed the Hoshi family to achieve what many families cannot. Each new generation tends to come along with their own set of ideas, which can soon crumble down the business’s very existence. But the Hoshis have ensured that each heir is fully invested in the success of the business and keeping its legacy going. Source: Adapted from Morten Bennedsen, ‘Centuries-old Japanese family-owned inn a model for succession’, South China Morning Post, 1 March 2014, Published by South China Morning Post Publishers Ltd, ª 2014. http://www.scmp.com/business/companies/article/1436947/centuries-old-japanese-family-owned-inn-model-succession.

CHALLENGES FACING FAMILY BUSINESSES Family companies face the same economic issues as all businesses, including market and technological changes, shifting consumer tastes, ever-tougher competition and political instability. Nevertheless, they have many aspects that are unique to them: • they may lack the financial capability of larger, more diversified businesses • they may have less management expertise to cope with these pressures • like all families, they have their psychological toils and tribulations.

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Why no onions for Singaporean family business? On CourseMate Express read about the ‘oranges’ style of family management hierarch.

Family businesses are by definition three overlapping systems – Family, Owners and ManagerEmployees – called the Three-Circles Model (Figure 7.3). The entire family with all its generations inhabits the Family circle (bottom left). But there are three types of Family: Family members who own shares but do not work there; those who work there but do not own shares; and fully vested Family Owner-Employees. Family are most concerned with reputation, dividends and family unity. Then there is the Ownership circle (top). Some may be external investors who are neither family nor employees; others are non-family managers or employees. The owners have different interests; to them business performance and dividends are what matter. Finally, is the Management-Employee circle (bottom right). This includes both owner-employees who are not family members; and family who work in the business but do not own shares. They are most concerned with reputation, career opportunities, bonuses and performance measures. In the very centre are the fully vested FamilyOwner-Managers. This includes the founder or a senior family member. They are concerned with any or all of the interests and concerns of the other groups.15

FIGURE 7.3 THREE-CIRCLES MODEL OF FAMILY BUSINESS

Non-family, non-manager owners

Family owners Familyowneremployees Family members

Non-family owneremployees

Non-family employees Family employees

Source: Tagiuri, Renato & John Davis, ‘Bivalent attributes of the family firm’, Family Business Review 9(2) (1996), 199–208. Copyright ª 1996 by SAGE Publications. Reprinted by permission of SAGE Publications.

Why should the eldest son always inherit the business? On CourseMate Express read about how Malaysian family businesses are evolving.

In reality, though, only one-third of family businesses globally succeed in making the leap across generations. Some 70 per cent of family-owned businesses fail or are sold before the second generation gets a chance to take over.16 In contrast to publicly owned companies, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, generational trends, business models and consumer behaviour. Most are sold or wound up after the founder’s death. It is said that the first generation establishes the business, the second generation develops it and the third one destroys it. Some studies suggest that only 5 per cent of family businesses are still creating shareholder value beyond the third generation.17 Family-owned companies can succeed and grow in spite of complex challenges.18 A variety of reasons helps account for this. One is that these businesses have not been encumbered by demanding shareholders who want to dictate operating strategy. A second is that the family members are willing

Chapter 7: Entrepreneurial families: succession and continuity 231

to sacrifice short-term profits for long-term gains. Research shows that family members are more productive than other employees.19 A third factor is the company’s flexibility, a trait that has allowed family businesses to respond to challenges and opportunities in an unrestricted manner. In addition, owners of family firms can convey an image of stability – that the company is in business for the long haul and will provide continuity for customers and employees alike.20 Family values and influences can help the operation of a business. According to researchers, three advantages may be forthcoming after start-up: • preserving the humanity of the workplace – a family business can easily demonstrate higher levels of concern and caring for individuals than are found in the typical corporation • focusing on the long run – a family business can take the long-run view more easily than corporate managers who are judged on year-to-year results • emphasising quality – family businesses have long maintained a tradition of providing quality and value to the consumer.21 Psychologist Manfred Kets de Vries examined the advantages and disadvantages associated with family businesses.22 Table 7.1 provides an overview of his particular items. Some of the key advantages have already been touched on (greater flexibility of action, long-term orientation, stability, resilience and less bureaucracy). The disadvantages include family disputes, paternalistic (or maternalistic) rule, confusing organisation (no clear division of tasks), nepotism (favouring sometimes inept family members for employment and promotion over other qualified candidates) and succession dramas. An interesting way to depict a family business’s timeline and possible future is called a genogram. A genogram is an organisation chart for the family. It is an enhanced family tree that shows not only family events like births and deaths, but also indicates the relationships (close, conflicted, cut-off, etc.) TABLE 7.1

ADVANTAGES AND DISADVANTAGES OF FAMILY-CONTROLLED BUSINESSES

ADVANTAGES

DISADVANTAGES

Long-term orientation Greater independence of action Less (or no) pressure from stock market Less (or no) takeover risk Family culture as a source of pride Stability Strong identification/commitment/motivation Continuity in leadership Greater resilience in hard times Willing to plough back profits Less bureaucratic and impersonal Greater flexibility Quicker decision making Financial benefits Possibility of great success Knowing the business Early training for family members

Less access to capital markets may curtail growth Confusing organisation Messy structure No clear division of tasks Nepotism Tolerance of inept family members as managers Inequitable reward systems Greater difficulties in attracting professional management Spoiled-kid syndrome Internecine strife Family disputes overflow into business Paternalistic/autocratic rule Resistance to change Secrecy Attraction of dependent personalities Financial strain Family members milking the business Disequilibrium between contribution and compensation Succession dramas

Source: Kets de Vries, M. F. R. (1993). The dynamics of family-controlled firms: The good news and the bad news. Organisational Dynamics, Winter, 61. Copyright ª 1993, with permission from Elsevier.

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among individuals in the family. It is a useful tool for spotting relationship patterns across generations, and decrypting seemingly irrational behaviour. Positive happenings can be illustrated as lines going above the horizontal line (the more positive the event, the higher the peak of the line). Negative or unhappy events can be drawn as lines going below the neutral line (see Figure 7.4). FIGURE 7.4 FAMILY BUSINESS TIMELINE

1st child born

2nd child born

meet, marry

diversification series of good crops, buy more land

Positive kids enter business

Neutral

Started farm

succession of poor crops

dad ill, hire help

dad dies Today

Negative

Source: Enterprising Rural Families, An Online Newsletter August 2006, vol. II(8), Copyright ª 2006 by Enterprising Rural Families. Used by permission.

FAMILY BUSINESS IN THE AGE OF ENVIRONMENTAL SUSTAINABILITY On the subject of family business timelines, it is worth briefly noting that the timeline in Figure 7.4 said nothing about climate change or environmental sustainability. Where would you put, for example, the floods in Queensland in early 2011 that destroyed many Australian family businesses? When doing a genogram (see above) of a Filipino family business, how would you map 2013 Typhoon Haiyan (Yolanda), one of the strongest tropical cyclones ever recorded, which had a $14 billion economic impact? Don’t these affect a family’s fortunes as much as other factors? Environmental sustainability is particularly relevant for family-controlled businesses. This is because family businesses are strongly connected to their communities and are oriented towards preserving wealth and ensuring success for future generations. The reasons for the importance of sustainability are compelling. The research is just beginning in this area. Are family firms more susceptible to climate change effects than non-family firms? Family firms are less insulated from water stress, depletion of natural resources, pollution and climate change than other larger firms. Some scholars suggest that family firms actually pollute less than other firms.23 But do they invest more patient (that is, long-term) capital in clean technologies and sustainable practices as compared to publicly held firms? Or, do some of these firms face their own unique challenges due to family dynamics that must be overcome before sustainability strategies can be successfully implemented? What effect do family firms’ goals and ownership/governance structures have on those organisations’ sustainability strategies? Do some family firms perform better than others on multiple performance dimensions of survival, sustainability and financial performance? How do non-traditional family and kinship structures affect sustainability strategies? We do know that climate change and global warming are affecting the fortunes and longevity of family businesses. A crop failure may mean bankruptcy. A new pollution regulation can put a family business into debt or make it uncompetitive. On the reverse side, some families can take advantage of

Chapter 7: Entrepreneurial families: succession and continuity 233

this by positioning themselves in eco-tourism or serving the lifestyles of health and sustainability (LOHAS) market (see Chapter 10). Long-term stewardship is generally a core value at family firms. Many families believe that business has both an opportunity and an obligation to make the world better by advancing environmental and social progress.24

WHAT IS A SUSTAINABLE–SUSTAINABLE FAMILY BUSINESS? For centuries, a family business could plunder and exploit the planet as long as its family was ENTREPRENEURIAL able to sustain itself. Things have changed with the advent of climate change and global warming as very real threats to family businesses. As well, some families are coming to grips with what it means to be a sustainable–sustainable business (See discussion of the two EDGE meanings of sustainable in Chapter 4, page 120.). In other words, these families seek to preserve themselves while they preserve the planet. One excellent case is O’Reilly’s Rainforest Guesthouse located in the Lamington National Park in Queensland, Australia. It is a family-owned and family-operated business that was established in 1926. Currently, the business is managed by the third generation. This generation is made up of members from two family groups: four offspring of Peter O’Reilly and 10 offspring of Vince O’Reilly. The CEO is the eldest son of Peter O’Reilly. The family defines ecotourism as ‘nature based tourism that occurs in a natural area, is ecologically sustainable, and through interpretation educates participants about the area. It must also contribute to local conservation (environmental) and local (social) communities’. To them it’s a model of development that shows local landholders that there is a sustainable alternative to farming. The family has been pursuing a professionalisation agenda for a number of years, especially under the leadership of its current third-generation CEO, who learned business outside the family business in the hospitality industry, both in Australia and overseas. Included among its professional measures are both an active board of directors and regular family retreats. The seven-member board of directors meets monthly and is chaired by a non-family independent director and includes two other independent non-family directors. Additionally, the family has been holding family meetings since the early 1990s. These meetings have now evolved into retreats that are typically held over two days and include all family members plus spouses/partners. O’Reilly’s continues to follow its eco-tourism philosophy. While Queensland tourism ‘gets flirty with big business’, O’Reilly’s is as interested in environmental research as much as accommodation. They have a good mix of sustainability and business sense. They support the controversial sustainable development of national parks lest they become irrelevant. Meanwhile, the resort has been active in Clean Up Australia Day and Earthhour (focusing on threats to Australia’s Great Barrier Reef), and purchases a percentage of their energy via green sources. O’Reilly’s is one of the most successful ecotourism businesses in Australia. The business started in the 1930s and has grown to include a restaurant, a day visitors’ area, cultural and natural tours, weekend events and children’s activities. The business employs 70 full-time and 25 part-time staff and has a turnover of $10 million per year. The O’Reillys believe that the secret to their success is truly sustainable management, of the planet and of their family and community. The O’Reillys market themselves at tourism conferences by providing keynote speeches and providing best practice advice. One family member also chairs the Australian Ecotourism Association. Sources: O’Reilly’s, ‘Environmental commitment’, http://www.oreillys.com.au/about-us/environmental-commitment; Moores, K. & Craig, J. (2006), ‘From vision to variables: A scorecard to continue the professionalisation of the family firm’, in P. Z. Poutziouris, K. X. Smyrnios & S. B. Klein (eds), Handbook of research on family business. Cheltenham, UK: Edward Elgar, 200; Amy Remeikis, ‘Queensland gets flirty with big business’, Brisbane Times, 23 May 2013, http://www.brisbanetimes.com.au/queensland/queensland-gets-flirty-with-big-business20130523-2k1za.html; Des Houghton & Andrew MacDonald, ‘Queensland government to open national parks to eco-tourism’, The Courier-Mail (Brisbane), 17 August 2013, http://www.couriermail.com.au/news/queensland/queensland-government-to-open-national-parks-toecotourism/story-fnihsrf2-1226698758572?nk¼e9306950d06b474390f80f6f0b151275; Scottish Enterprise (2006), Perspectives on international best practice green tourism: Final report. Edinburgh: Natural Capital, 78–80.

SUCCESSION AS A PATHWAY TO ENTREPRENEURSHIP Continuing the theme of pathways to entrepreneurship that runs through this book, if you are the son or daughter of an entrepreneurial family, even an in-law or more distant relative, chances are you can consider ‘succession’ as a pathway to your entrepreneurial future. Research shows that many

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family businesses go out of existence after 10 years. Only three out of 10 survive into a second generation. More significantly, only 16 per cent of all family enterprises make it to a third generation. The average life expectancy for a family business is 24 years, which is also the average tenure for the founders of a business.25 You can use this to your advantage with proper foresight and planning. This is true around the world. According to recent research, almost half of Hong Kong’s small business owners intend to pass their businesses on to professional managers instead of their children when they retire. This break from Asian tradition was also evident in the other regions surveyed – India, Malaysia, Singapore and South Korea – where 42 per cent of small business owners planned to pass their businesses on to professional managers and only 28 per cent intended to keep them in the family.26 One of the major problems most family businesses have is the lack of preparation for passing managerial control to the next generation. The cruel fact is that one generation succeeds the other with biological inevitability, yet most family businesses never formulate succession plans. If your founding father or mother has not approached you yet, it might be prudent to approach them and ask about their plans for succession. Management succession, which involves the transition of managerial decision making in a business, is one of the greatest challenges confronting owners and entrepreneurs in family businesses. At first glance, succession would not seem to be a major problem. All an owner has to do is designate which heir will inherit the operation or, better yet, train one (or more) of them to take over the business during the founder’s lifetime. Unfortunately, this is easier said than done. A number of problems exist. One of the major problems is the owner. To a large degree, the owner is the business. The individual’s personality and talents make the operation what it is. If this person were to be removed from the picture the company might be unable to continue. Additionally, this individual may not want to be removed. So if the founder starts to have health problems or is unable to manage effectively, they may still hang on – even to the detriment of the business. The owner often views any family attempt to get them to step aside as greedy efforts to plunder the operation for personal gain. What’s more, the owner and family members may feel anxiety over death, since raising the topic of death conjures up a negative image in everyone’s mind. Other barriers to succession include sibling rivalry, family members’ fear of losing status, or a complete aversion to death for fear of loss or abandonment.27 Table 7.2 provides a list of barriers to succession attributed to the owner and to the family. TABLE 7.2

BARRIERS TO SUCCESSION PLANNING IN FAMILY BUSINESSES

FOUNDER/OWNER

FAMILY

Death anxiety Company as symbol Loss of identity Concern about legacy Dilemma of choice Fiction of equality Generational envy Loss of power

Death as taboo Discussion is a hostile act Fear of loss/abandonment Fear of sibling rivalry Change of spouse’s position

Source: Kets de Vries, M. F. R. (1993). The dynamics of family-controlled firms: The good news and the bad news. Organisational Dynamics, Winter, 61, p. 78. Published by American Management Association, ª 1993.

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There are two ways to deal with this – one from the owner’s perspective, the other from the successor’s perspective. • The owner should develop a succession plan. Since many people want to keep the business in the family, a decision has to be made regarding an heir. This is often psychologically difficult. Choosing an heir can be like buying a cemetery plot. It is an admission of one’s mortality. Owners who refuse to face the succession issue, however, place an unnecessary burden on those whom they leave behind. Family successor problems are not insurmountable. For our consideration of these problems, the best place to begin is with an identification of the key factors in succession. • As a potential successor (for example, you are the only child), you should ask yourself, ‘Am I truly interested in taking over?’ You might reflect, ‘Yes, Dad has always said ‘‘there’s always a place for you here’’.’ But your inexperience can increase the chances that the business will fail. Are you truly competitive? Have you earned a university degree, gained experience outside the family business, can you compete for open positions with non-family applicants? Too many companies are led by NextGens who failed in other businesses or spent their 20s (and sometimes their 30s) as aspiring athletes, artists or musicians before signing on to the business as unprepared 40-somethings.28 However, this may be exactly why you are studying entrepreneurship!

KEY FACTORS IN SUCCESSION Be aware that ‘smooth succession’ in a family business is sometimes a contradiction in terms because succession is a highly charged emotional issue that requires not only structural changes, but cultural changes as well.29 Family succession includes the transfer of ethics, values and traditions along with the actual business itself. The family business and the business family are two distinct components that must be dealt with and disentangled if progress towards succession is to be made.30 A number of considerations affect the succession issue.31 One way to examine them is in terms of pressures and interests inside the business and outside the business. Another way is to examine forcing events. A third way is to examine the sources of succession.

PRESSURES AND INTERESTS INSIDE THE BUSINESS Two types of succession pressures originate within the family firm. One comes from the family members. The other comes from non-family employees.32

Family members After giving their children life, directing their every step and investing so much in them, many founders may still be nervous about handing their children control and ownership of their personal and business assets. When members of the family are also employees, a number of succession-type problems can arise. One is that the family members may want to keep the business in existence so that they and their families will be able to manage it. Sometimes this results in the members wanting to get, or increase, control over operations. Another common development is pressure on the ownermanager to designate an heir. A third possible development is rivalry among the various branches of the family. For example, each of the owner’s children may feel that the owner should put them (or one of their children) in charge of the operation. Given that only one of the family branches can win this fight, the rivalry can lead to the sale or bankruptcy of the business.33 The business – and gossip – pages of Asia’s magazines and newspapers are rife with examples of corporate families locked in bitter court battles over the family fortune.

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Non-family employees Non-family employees sometimes bring pressure on the owner-manager in an effort to protect their personal interests. For example, long-term employees often think the owner should give them an opportunity to buy a stake in the company, or they believe they should be given a percentage of the business in the owner’s will. Such hopes and expectations are often conveyed to the owner and can result in pressure for some form of succession plan. Moreover, to the extent that non-family employees are critical to the enterprise’s success, these demands cannot be ignored. The owner must reach some accommodation with these people if the business is to survive.34

SUCCESSION PRESSURES AND INTERESTS OUTSIDE THE BUSINESS Outside the business, both family members and non-family elements exert pressure on and hold interest in the company’s succession.

Family members Even when family members do not play an active role in the business, they can apply pressure. Quite often these individuals are interested in ensuring that they inherit part of the operation and they will put pressure on the owner-manager towards achieving that end. In some cases they pressure in order to get involved in the business. Some family members will pressure the owner-manager to hire them. Quite often these appeals are resisted on the grounds of the company not needing additional personnel or needing someone with specific expertise (sales ability or technical skills) and thus the owner sidesteps the request.

Non-family elements Another major source of pressure comes from external environmental factors. One of these is competitors who continually change strategy and force the owner-manager to adjust to new market considerations. Other factors include customers, technology and new-product development. These forces continually change and the entrepreneur must respond to them. Tax laws, regulatory agencies and trends in management practices constitute still other elements with which the owner-manager must contend.35

FORCING EVENTS Forcing events are those happenings that cause the replacement of the owner-manager. These events require the entrepreneur to step aside and let someone else direct the operation. The following are typical examples: • death, resulting in the heirs immediately having to find a successor to run the operation • illness or some other form of non-terminal physical incapacitation • mental or psychological breakdown, resulting in the individual having to withdraw from the business • abrupt departure, such as when an entrepreneur decides, with no advance warning, to retire immediately • legal problems, such as incarceration for violation of the law • severe business decline, resulting in the owner-manager deciding to leave the helm • financial difficulties, resulting in lenders demanding the removal of the owner-manager before lending the necessary funds to the enterprise.

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These types of events are often unforeseen and the family seldom has a contingency plan for dealing with them. As a result, when they occur they often create major problems for the business. These considerations influence the environment within which the successor will operate. Unless that individual and the environment fit well, the successor will be less than maximally effective.

SOURCES OF SUCCESSION An entrepreneurial successor is someone who is high in ingenuity, creativity and drive. This person often provides the critical ideas for new-product development and future ventures. The managerial successor is someone who is interested in efficiency, internal control and the effective use of resources. This individual often provides the stability and day-to-day direction needed to keep the enterprise going. When looking for an inside successor, the entrepreneur usually focuses on a son or daughter or nephew or niece with the intent of gradually giving the person operational responsibilities followed by strategic power and ownership. An important factor in the venture’s success is whether the founder and the heir can get along. The entrepreneur must be able to turn from being a leader to being a coach, from being a doer to being an adviser. The heir must respect the founder’s attachment to the venture and be sensitive to this person’s possessive feelings. At the same time the heir must be able to use their entrepreneurial flair to initiate necessary changes.36 When looking ahead towards choosing a successor from inside the organisation, the founder often trains a team of executive managers consisting of both family and non-family members. This enables the individual to build an experienced management team capable of producing a successor. The founder assumes that, in time, a natural leader will emerge from the group.37 Sometimes the founder will look for a non-family outsider to be the successor, perhaps only temporarily. The entrepreneur may not see an immediate successor inside the company and may decide to hire a professional manager, at least on an interim basis, while waiting for an heir to mature and take over. Another form of non-family outsider is the specialist who is experienced in getting ventures out of financial difficulty. The founder then usually gives the specialist total control, and this person later hands the rejuvenated venture to another leader. Still another non-family approach is for the founder to find a person with the right talents and to bring this individual into the venture as an assistant, with the understanding that they will eventually become president and owner of the venture. No heirs may exist, or perhaps no eligible family member is interested.

INDIAN BUSINESS FAMILIES GROOM THEIR YOUNGER GENERATION • • •

•

Reliance Industry’s chairman Mukesh Ambani’s elder son Akash (19) got a taste of the corporate ENTREPRENEURSHIP world when he accompanied his father while signing the landmark deal with British Petroleum. Brothers Shashi and Ravi Ruia, owners of Essar Group, groomed Shashi’s sons Prashant and Anshuman early in university and they have now taken up the mantle. IN PRACTICE A fourth generation member of the Marwari business run by Birla family, from the state of Rajasthan, Kumar Mangalam Birla was just 24 years old when he took over the reins of the Aditya Birla Group, when his father died in 1995. He transformed the group in 16 years from a $2 billion company into a $30 billion global diversified conglomerate spanning 35 countries. Ernst & Young Entrepreneur of the Year Award winner and retail giant Kishore Biyani, owner of Pantaloon, is grooming his daughter Ashni (22), niece Vidisha (26) and nephew Vivek (24). His plan is to shuffle the youngsters across

cont.

»

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• • •

several fairly high-level responsibilities early on; let them fend for themselves without any intervention whatsoever and let them earn the respect of managers, or lose it; mentor them, and over time, pull them completely out of operations, and move them into the strategic role of stewardship and preserving family wealth. In a break with tradition, Ratan Tata, the fourth-generation chairman of India’s largest diversified family conglomerate, the Tata Group, appointed a non-family member to succeed him. Founded in the early 1930s, Dalmia Group has found a way to avoid conflict by creating a family council to take decisions on business and strategies for the group. Airport developer Grandhi Mallikarjuna Rao drafted a Family Constitution with clear succession plans for every sibling of the group. The son-in-law and (two) sons will decide who will be the next chairman. Two options are available in a deadlock: either a partnership model, where the group is run as a partnership by the three; or a rotating chairmanship among the three, every five years. Every three months all family members meet to clear the air. Sources: Choudhury, G. & Srivastava, T. (4 April 2011), ‘Successor to be from within family’, GMR, Hindustani Times, http://www.hindustantimes. com/business-news/InterviewsBusiness/Successor-to-be-from-within-family-GMR/Article1-681229.aspx; Dalal, S. (28 May 2007), ‘GMR scripts succession plan through a family constitution’, Indian Express, http://www.indianexpress.com/news/gmr-scripts-succession-planthrough-a-family-constitution/32006/0; Forbes (2006), ‘#245 Ravi & Shashi Ruia’, Forbes; Kalesh, B. (2011), ‘Tata succession fresh chapter in family sagas’, The Financial Express, http://www.financialexpress.com/news/tata-succession-fresh-chapter-in-family-sagas/880949/0#; Wikipedia, ‘Ratan Naval Tata’, http://en.wikipedia.org/wiki/Ratan_Tata; Wikipedia, ‘Kumar Mangalam Birla’, http://en.wikipedia.org/wiki/Kumar_Mangalam_Birla.

DEVELOPING A SUCCESSION STRATEGY On CourseMate Express read about the sadness of Rupert Murdoch. The great man’s kids don’t want to work in the empire.

As we can see, succession is a viable pathway to entrepreneurial ventures. Helping your relatives to develop a succession strategy involves several important steps: (1) understanding the contextual aspects, (2) identifying successor qualities and (3) understanding influencing forces and carrying out the succession plan.38

UNDERSTANDING THE CONTEXTUAL ASPECTS Here are the five key aspects that must be considered for an effective succession.

Time The earlier the entrepreneur begins to plan for a successor, the better the chances of finding the right person. The biggest problem the owner faces is the prospect of events that force immediate action and result in inadequate time to find the best replacement.

Type of venture Some entrepreneurs are easy to replace; some cannot be replaced. To a large degree, this is determined by the type of venture. An entrepreneur who is the ideas person in a high-tech operation is going to be difficult to replace. The same is true for an entrepreneur whose personal business contacts throughout the industry are the key factors for the venture’s success. On the other hand, a person running an operation that requires a minimum of knowledge or expertise usually can be replaced without much trouble.

Capabilities of managers The skills, desires and abilities of the replacement will dictate the future potential and direction of the enterprise. As the industry matures, the demands made on the entrepreneur may also change. Industries where high-tech is the name of the game often go through a change in which marketing becomes increasingly important. A technologically skilled entrepreneur with an understanding of marketing, or with the ability to develop an orientation in this direction, will be more valuable to the enterprise than will a technologically skilled entrepreneur with no marketing interest or background.

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Entrepreneur’s vision Most entrepreneurs have expectations, hopes and desires for their organisation. A successor, it is hoped, will share this vision, except, of course, in cases where the entrepreneur’s plans have contributed to the organisation getting into trouble and a new vision is needed. An example is Apple Computer, where one of the founders, Steve Jobs, was replaced by John Sculley because the board of directors felt that a more managerial, day-to-day entrepreneur was needed to replace the highly conceptual, analytical Jobs. As history will now record, Steve Jobs returned later to lead Apple through some spectacular achievements.

Contextual factors Sometimes a successor is needed because the business context changes and a parallel change is needed at the top. The Sculley–Jobs example is one case in point. Another is that of Edwin Land of Polaroid. Although his technological creativity had made the venture successful, Land eventually had to step aside for someone with more marketing skills. In some cases owners have had to allow financial experts to assume control of the venture because internal efficiency was more critical to short-run survival than was market effectiveness.

IDENTIFYING SUCCESSOR QUALITIES Successors should possess many qualities or characteristics. Depending on the situation, some will be more important than others. In most cases, however, all will have some degree of importance. Some of the most common of these successor qualities are: • sufficient knowledge of the business or a good position (especially marketing or finance) from which to acquire this knowledge within an acceptable time • fundamental honesty and capability • good health • energy, alertness and perception • enthusiasm about the enterprise • personality compatible with the business • high degree of perseverance • stability and maturity • reasonable amount of aggressiveness • thoroughness and a proper respect for detail • problem-solving ability • resourcefulness • ability to plan and organise • talent to develop people • personality of a starter and a finisher • appropriate agreement with the owner’s philosophy about the business.39

WRITING A SUCCESSION STRATEGY These elements prepare the entrepreneur to develop a management continuity strategy and policy. A written policy can be established using one of the following strategies. • The owner controls the management continuity strategy entirely. This is very common, yet legal advice is still needed and recommended. • The owner consults with selected family members. Here, the legal adviser helps to establish a liaison between family and owner in constructing the succession mechanism.

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• The owner works with professional advisers. This is an actual board of advisers from various professional disciplines and industries that works with the owner to establish the mechanism for succession (sometimes referred to as a ‘quasi-board’).40 • The owner works with family involvement. This alternative allows the core family (blood members and spouses) to actively participate in and influence the decisions regarding succession. If the owner is still reasonably healthy and the company is in a viable condition, the following additional actions should be considered. • The owner formulates buy/sell agreements at the very outset of the company, or soon thereafter, and whenever a major change occurs. This is also the time to consider an appropriate insurance policy on key individuals that would provide the cash needed to acquire the equity of the deceased. • The owner considers employee stock ownership plans (ESOPs). If the owner has no immediate successor in mind and respects the loyalty and competence of his or her employees, then an appropriate ESOP might be the best solution for passing on control of the enterprise. After the owner’s death, the employees could decide on the management hierarchy. • The owner sells or liquidates the business when losing enthusiasm for it, but is still physically able to continue. This could provide the capital to launch another business. Whatever the owner’s plans, the business would be sold before it fails due to lack of interest. • The owner sells or liquidates after discovering a terminal illness, but still has time for the orderly transfer of management or ownership.41 Legal advice is beneficial for all of these strategies, but of greater benefit is having advisers (legal or otherwise) who understand the succession issues and are able to recommend a course of action. Entrepreneurial founders of privately held businesses often reject thoughts of succession. However, neither ignorance nor denial will change the inevitable. It is therefore crucial for entrepreneurs to design a plan for succession very carefully. Such plans prevent flourishing privately held businesses from becoming a statistic of diminishing family dynasties.

Consider outside help Promotion from within is a morale-building philosophy. Sometimes, however, it is a mistake. When the top person does a poor job, does promoting the next individual in line solve the problem? The latter may be the owner-manager’s clone. Alternatively, consider family-owned businesses that start to outgrow the managerial ability of the top person. Does anyone in the business really have the requisite skills for managing the operation? The questions that must be answered are: ‘How can the business be effectively run?’ and ‘Who has the ability to do it?’ Sometimes answering these questions calls for an outside person. Family businesses also face the ever-present ego factor.42 Does the ownermanager have the wisdom to step aside and the courage to let someone else make strategic decisions? Or is the desire for control so great that the owner prefers to run the risks associated with personally managing the operation? The lesson is clear to the dispassionate observer; unfortunately, it is one many owners have had to learn the hard way.43

HARVESTING THE VENTURE: RECYCLING WEALTH WITHIN THE FAMILY Recalling again our recurrent discussion of pathways to entrepreneurship, we reach another pathway to becoming an entrepreneur that ‘recycles’ wealth from the family venture. This pathway includes

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trade sales and IPO (initial public offerings). This pathway has somewhat broader implications than just for families as some entrepreneurs only realise their entrepreneurial dreams by first ‘harvesting’ another venture. A harvest plan defines how and when the owners and investors will realise an actual cash return on their investment. Note that ‘harvest’ does not mean that the challenges and responsibility of the entrepreneur are over. There are challenging decisions to be made. It may be a decision regarding managerial control and succession for successful continued operations as a privately held business. It may be a desire to initiate a liquidity event through which the venture is able to generate a significant amount of cash for the investors. It may be that the venture has grown to a stage at which the possibility of an Initial Public Offering (IPO), which will be discussed further in Chapter 14, is a reality. Or it may be that the most realistic opportunity is for the sale of the business. In any of these situations, the entrepreneur is confronted with a myriad of choices and possibilities. Although it is impossible to answer all of the questions that an entrepreneur faces – because each venture presents a unique set of circumstances – let us review some of the more common challenges that confront entrepreneurs during this stage. Two notable harvest strategies are the IPO and offering the venture for sale. The most common route to harvest is the second, which will be discussed more fully below. It is true that most entrepreneurs are focused on launching and growing their ventures rather than the plan for exiting the venture in years to come. However, sometimes implementing an exit strategy is a pathway. An exit strategy is defined as that component of the business plan where an entrepreneur describes a method by which investors and owners can realise a tangible return on their investment. The questions of ‘how much’, ‘when’ and ‘how’ need to be addressed. Investors, founders and descendants will, at some point, always want to convert their shares of the investment into a more ‘liquid’ form, known as a liquidity event, which refers to the positioning of the venture for the realisation of a cash return for the owners and the investors. The word ‘positioning’ a venture is used deliberately, as prior to moving into the liquidity event there is much work to do in preparing the venture to maximise the value of the investment, and this will be discussed further in Chapter 16. This ‘event’ is most often achieved through an initial public offering or complete sale of the venture. Trade sale is another option, and is discussed below.

TRADE SALE OF THE VENTURE After considering the various succession ideas presented in this chapter, the trade sale of an existing venture may be the most appropriate pathway towards a new entrepreneurial venture. This harvesting strategy needs to be carefully prepared in order to obtain the adequate financial rewards.44

Steps for selling a business If you are planning to use the harvest strategy of a trade sale as a pathway, there are generally eight steps for the proper preparation, development and realisation of the sale of a venture, as follows.45 These steps assume that the venture has achieved harvest positioning and is therefore simply ready for sale. Step 1: Prepare a financial analysis The purpose of such an analysis is to define priorities and forecast the next few years of the business. These fundamental questions must be answered: – What will executive and other workforce requirements be and how will we pay for them? – If the market potential is so limited that goals cannot be attained, should we plan an acquisition or develop new products to meet targets for sales and profits? – Must we raise outside capital for continued growth? How much and when?

On CourseMate Express read about harvest strategy: selling out. Steps for selling a business.

On CourseMate Express read about the politics of family floats. How IPOs can tear a family apart.

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Methods of venture valuation. On CourseMate Express read about the key approaches to establishing value.

Harvesting your business online. On CourseMate Express read about the best ways to maximise the sale digitally.

Step 2: Segregate assets Tax accountants and lawyers may suggest the following steps to reduce taxes: – Place real estate in a separate corporation, owned individually or by members of the family. – Establish a leasing subsidiary with title to machinery and rolling stock. You can then lease this property to the operating company. – Give some or all of the owner’s shares to heirs when values are low, but have the owner retain voting rights. Thus, when a sale is made, part or all of the proceeds can go directly to another generation without double taxation. – Hold management’s salaries and fringe benefits at reasonable levels to maximise profits. Step 3: Value the business Obviously, establishing the valuation of a company constitutes a most important step in its sale. Step 4: Identify the appropriate timing Knowing when to offer a business for sale is a critical factor. Timing can be everything. Here are a few suggestions: – Sell when business profits show a strong upward trend. – Sell when the management team is complete and experienced. – Sell when the business cycle is on the upswing, with potential buyers in the right mood and holding excess capital or credit for acquisitions. – Sell when you are convinced that your company’s future will be bright. Step 5: Publicise the offer to sell A short prospectus on the company that provides enough information to interest potential investors should be prepared. This prospectus should be circulated through the proper professional channels – bankers, accountants, lawyers, consultants and business brokers. Step 6: Finalise the prospective buyers Inquiries need to be made in the trade concerning the prospective buyers. Characters and managerial reputation should be assessed in order to find the best buyer. Step 7: Remain involved through the closing Meeting with the final potential buyers helps to eliminate areas of misunderstanding and enables you to negotiate the major requirements more effectively. Also, the involvement of professionals such as lawyers and accountants usually precludes any major problems arising at the closing. Step 8: Communicate after the sale Problems between the new owner and the remaining management team need to be resolved in order to build a solid transition. Communication between the seller and the buyer and between the buyer and the current management personnel is a key step. In addition to these eight steps, an entrepreneur must be aware of the tax implications arising from the sale of a business. For professional advice, a tax accountant specialising in business valuations and sales should be consulted. The eight steps outlined here will help entrepreneurs harvest their ventures. The steps provide a clear framework within which entrepreneurs can structure a fair negotiation leading to a sale. If the purpose of a valuation is to sell the business, then the entrepreneur must plan ahead and follow through with each step.

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SUMMARY This chapter focused on entrepreneurial family businesses and family management succession. Family business is one pathway to entrepreneurial ventures. Pathways are a central theme to this book, and were first discussed in Chapter 5. We examined the role of family business in the modern economy. For some, this is the natural route to enter an entrepreneurial career. The key to long-term business success lies in the ability to build and sustain an entrepreneurial family, which we call transgenerational entrepreneurship. We investigated the difference between an entrepreneurial family business and a normal family business in terms of the entrepreneurial mind-set that needs to be transferred from one generation to the next. At the core of this are such concepts as familiness and family capital. We looked at the status of family business entrepreneurs in the Asia–Pacific region. Their range and diversity is surpassed only by their economic impact. Family businesses face a number of unique challenges, not the least of which are the psychological toils and tribulations arising from within families. We also identified that there actually is something called ‘sustainable–sustainable’ family business. There is considerable potential for conflict when the family system meets the business system. The Three-Circles Model of family business helped us understand these dynamics. The sad fact is that only one-third of family businesses make it down into the second generation. But there are several factors that give strength and hope to their survival. Their disadvantages are matched by their advantages. We can also view this in terms of a family timeline of business history. Even in the age of environmental sustainability, family businesses are impacted by climate change in ways that are different from other businesses. A number of considerations affect succession in family business. Family and non-family members, both within and outside the business, often bring pressure on the entrepreneur. Some want to be put in charge of the operation; others simply want a stake in the enterprise. Two types of successors exist. An entrepreneurial successor provides innovative ideas for new product development whereas a managerial successor provides stability for day-to-day operations. An entrepreneur may search inside or outside the family as well as inside or outside the business. The actual transfer of power is a critical issue and the timing of entry for the successor can be strategic. Developing a succession plan involves understanding these important contextual aspects – time, type of venture, capabilities of managers, the entrepreneur’s vision and environmental factors. Also, forcing events may require the implementation of a succession plan regardless of whether or not the business is ready to implement one. This is why it is so important to identify successor qualities and carry out the succession plan carefully. The chapter continued with a discussion of the entrepreneur’s decision to sell. The process was viewed as a method to ‘harvest’ a well-positioned venture investment and eight specific steps were presented for entrepreneurs to follow in pursuing a trade sale.

KEY TERMS AND CONCEPTS buy/sell agreements employee stock ownership plans (ESOPs) entrepreneurial successor exit strategy familiness family emotional capital family social capital forcing events genogram

Entrepreneurship

harvest plan harvest positioning liquidity event LOHAS management succession managerial successor nepotism succession succession plan Three-Circles Model

Review key terms with interactive flashcards

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REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Why is an entrepreneurial family business different from other family businesses? What is transgenerational entrepreneurship and what are the elements of ‘familiness’? What are the four kinds of family capital? Talk about the size and impact of family businesses on Asia–Pacific economies, and in particular within the economy you are most familiar with. Can you relate a story about a family business you know that explains the Three-Circles Model in some detail? Think of a family company that you know. Which advantages and which disadvantages does that family business have? Why should a family business be interested in environmental sustainability? Do you agree that family firms are more susceptible to climate change effects than non-family firms? What are the elements of a ‘sustainable–sustainable’ family business? Can you name one in your community? A number of barriers to succession in family businesses exist. Using Table 7.2, identify some of the key barriers. What pressures do entrepreneurs sometimes face from inside the family? What pressures do entrepreneurs sometimes face from outside the family? What are three of the contextual aspects that must be considered in an effective succession plan? In what way can forcing events cause the replacement of an owner-manager? Cite three examples. What are five qualities or characteristics successors should possess? What are four steps that should be taken in carrying out a succession plan? What do we mean by ‘liquidity event’? How can one best maximise it? What eight steps should be followed to harvest a business? Discuss each of these steps.

EXPERIENCING ENTREPRENEURSHIP Who emigrates first? The purpose of this group exercise is to understand how migrant families deal with taking their family business overseas. Six is a good number of participants, but numbers can be adjusted by adding roles. 1 (5 minutes). The group starts out with members describing in as much detail as possible a family business she or he owns, has worked for or simply just knows about. Be sure to include what you know about the number of family members, their ages, etc. 2 (3 minutes). Now one of you should tell the following story. You can embellish it if you want: This is a business family who due to an economic crisis has decided to leave their country. They have a visa to travel to Singapore, but what they really want is refugee status or a business visa in New Zealand. The family runs a successful desserts shop, but relies on the 25-year-old son as their leader. The family has worked for generations in cakes and confectionery and has a good kitchen, relies on recipes passed down and has a source of innovative talent as well as small business practice. The plan is to send two family members out first and then bring the others over. They need take only the bare minimum with them since they can buy the kitchen equipment and the raw materials overseas. You can add a bit to the story. 3 (5 minutes). Each person now adopts the role of a different family member. The roles assigned will be: (1) an elderly grandmother who is a genius at decorating cakes; (2) an at-home mother who does the financial accounts; (3) a father working three jobs to make ends meet; (4) a 25-year-old son with a certificate in culinary arts, who actually runs the business right now; (5) his 21-year-old sister, who speaks several languages; and (6) his stay-at-home wife. They have no children of their own yet. 4 (5 minutes). Play your role until you have agreed on the family’s big plan. Answer the question: Which family member(s) should go first? You should each start the discussion by saying ‘I think we should . . .’ 5 (5 minutes). After you have talked it out, now talk about your experiences and the lessons you can draw from the exercise.

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EXPERIENCING ENTREPRENEURSHIP Passing it on Management succession and continuity are two of the critical concerns of most entrepreneurs. In your library, look through the past-year issues of business magazines. Focus on articles related to the management succession and continuity of specific businesses. Then choose the two you find most interesting and informative and for each business answer the following questions. 1 What business is this company in? 2 What difficulties did the owner have formulating a strategy regarding their succession? 3 What was the entrepreneur’s final decision on how to handle the succession? 4 What lessons can be learned from this individual’s experience? Based on what you have learned from these two cases, what recommendations would you give to an entrepreneur who is in the process of developing a succession plan? Be as helpful as possible.

CASE STUDIES CASE 7.1 Just as good as ever When Jason Jones was found in the storage area, no one knew for sure how long he had been unconscious. Within 30 minutes he was in the emergency room of Mercy Hospital and by early The Comeback Corbans. evening the doctors had determined that Jason had suffered a mild heart attack. On CourseMate Express During the first few days he was in hospital, Jason’s family was more concerned with his read about how a New health than anything else. However, as it became clear Jason would be released within a week Zealand family wine dynasty reinvents itself. and would be allowed back at work within two weeks, family members talked about his stepping aside as president of the operation and allowing someone else to take over the reins. Jason is president of a successful auto-parts supply house. Gross sales last year were $3.7 million. Working with him in the business are his son, daughter and two nephews. Jason started the business 22 years ago when he was 33. After working for one of the large oil firms for 10 years as a sales representative to auto-parts supply houses, Jason broke away and started his own company. At first, he hired outside help. Over the past five years, however, he has been slowly bringing his family on board. It was Jason’s hope that his son would one day take over the business, but he did not see this happening for at least another 10 to 15 years. Jason’s wife, Rebecca, believes that although he should continue to work, he should begin to train his son to run the business. On the day before he left hospital, she broached this subject with him and asked him to think about it. He replied: ‘What is there to think about? I’m too young to retire and Herbert does not know the business well enough to take over. It will take at least five more years before he is ready to run the operation. Besides, all I have to do is slow down a bit. I don’t have to retire. What’s the hurry to run me out of the company? I’m as good as ever.’ Rebecca and Herbert believe that over the next couple of months they must continue working on Jason to slow down and to start training Herbert to take over the reins. QUESTIONS

1 2 3

Why is Jason reluctant to hand over the reins to Herbert? Cite and discuss two reasons Jason should begin thinking about succession planning. What would you recommend Rebecca and Herbert do to convince Jason they are right? Offer at least three operative recommendations.

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CASE 7.2 Needing some help on this one When Jack Schultz started his company 10 years ago, he was lucky if he had two cars a day to work on. Today, Jack has 15 people working for him and he usually has a backlog of about five days’ work. Some of this work is repairs caused by car accidents; a lot of it is as a result of improper maintenance by the owners. Jack is 64 years old and feels he will work for about six more years before retiring. The business is very profitable and Jack and his wife do not need to worry about retirement income. However, Jack is concerned about what to do with the business. He has two children who work with him, Bob (31 years old) and Tim (29 years old). Jack has not asked either of them if they would want to take over the operation. He assumes they will. He also has a nephew, Richard (35 years old), working for him. All three of these relatives have been with Jack for nine years. Jack believes that any one of the three could successfully head the venture. But he is concerned about in-fighting should he favour one over the others. On the other hand, if he turns the business over to all three of them collectively, will they be able to get along with one another? Jack has no reason to believe the three cannot work things out amicably, but he is unsure. Jack has decided he cannot wait much longer to groom an heir. The major stumbling block is identifying who that person will be. Additionally, Jack really does not know anything about picking a successor. What characteristics should the individual possess? What types of training should the person be given? What other steps should be followed? Jack feels he needs to answer these questions as soon as possible. ‘I know how to plan business operations,’ he told his wife last week. ‘However, I don’t know how to go about planning for the succession of business operations. It’s a whole different idea. I need some help on this one.’ QUESTIONS

1 2 3

Identify and briefly describe four characteristics you would expect to find in a successful manager of this type of venture. What steps does Jack need to follow to successfully identify and groom a successor? Be complete in your answer. If you were going to advise Jack, what would you recommend he do first? How should he get started with his succession plan? What should he do next? Offer him some general guidance on how to handle this problem.

CASE 7.3 Family to family: the fall and rebirth of Darrell Lea Chocolates For Australia’s premier chocolate family, it had been a four-generations-long rise and fall to oblivion. From humble beginnings selling sweets from a pushcart, Patriarch Harry Lea had migrated to Australia from London in 1888 and founded the iconic business in the back of a Manly fruit shop in 1927, the year their son Darrell was born, thus the name. Four indolent generations later, in 2012 the $100 million business was insolvent. What went wrong provides lessons for both family businesses in Australia and chocolatiers around the world. On the family side, it was a classic case of the third-generation curse. The formula is well-known: the patriarch establishes the company to provide for his family. The second generation inherits the business and grows it. But the third generation takes the wealth as an entitlement and begins to squander it. The fourth generation totally loses the plot. Today, 40 or 50 Leas live comfortably on property portfolios and investments. One wise Lea had spotted the brewing trouble in the late 1990s. Jason, eldest of the third generation, could see the inevitable after 1983 when he became Managing Director. Sensing the generational sloth, Jason even dismissed his own son and his brother for incompetence. He also sacked himself and started looking for independent management as he realised that none of his family could manage the huge company it had become. Jason had come across the Three-Circles Model and appreciated the confusion and problems that occur in the innermost segment (see Figure 7.3). Despite his enlightened diagnosis (he became Chairman of Family Businesses Australia), the family resisted his plans before he died in 2005 from leukaemia. Nonetheless, by 1996, the company’s seventieth anniversary, Jason had put in place an outside Chairman, Alan Batley, and a non-family CEO, Jeff Moore. Alan well understood the emotional problems of dismissing family. ‘It’s important that family members aren’t just disenfranchised overnight. It’s an issue that has got to be handled with sensitivity’, he once

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said. While there were once 13 family members working in the business, by 2006 there were only three. One of them, Michael’s son Nicholas, a management consultant, provided the slender thread between the Family Council and the Board. Out on the shop floor, other important lessons important to chocolatiers were being learned. By the early 2000s Darrell Lea Chocolates was a $100 million business. It owned and operated 83 stores and managed 900 distribution licences. Staff numbers ranged up to 1200 and the company manufactured 95 per cent of the 400-plus product range. It was a major player in the Australian confectionery industry. Its licorice production alone was about 174 kilometres per day! Curiously, a consultant’s report contracted by Jason in 1998 had recommended the inevitable: closing the stores, moving out of the decrepit factory and reducing the product line. They were making hundreds of products that didn’t sell. Others they sold at a loss. By 2003, Batley had been succeeded by John Tolmie – previously with Kellogg’s and Franklins – who steered the company to govern more like a public company and was working on a retention strategy and a succession plan. But unable to remove the family entitlements, all of this mounted up and by 2012 the company was insolvent and placed in administration by the creditors. The only options were recapitalise the business (family members take money back out of homes and boats), break it apart and sell it in pieces, or (hardest of all) find a deep pockets buyer who was also a ruthless corporate down-sizer. Fortunately for Australian chocophiles, the administrator found that exact type of buyer who fired 90 per cent of the employees, closed all the owned-and-operated stores, and reduced the 400 products down to . . . well licorice, rocky road, and charity bars. These buyers were the Quinn family, Christina and Tony Quinn and son Klark, already way high up on the BRW Rich List with a personal fortune of over $400 million. Tony was a been-there, done-that, rugged entrepreneur who started off selling meat drippings in New Zealand before moving to Australia and building a $200 million pet food business. He also owned the Australian GT Championship and a Motorsport Park, and he races Aston Martins. With all of that achievement, he was looking for a distressed asset. ‘I was ready to take a tarnished brand and give it a new shine.’ Tony and Klark injected $30 million into the business and replaced the ageing factory with a purpose-built operation. They were able to return the company to profit with aggressive cost-cutting and limiting its products range. Fortunately for the Quinns, customer loyalty and goodwill were intact. It was the cost of doing business (COB) that was taking away the margin. The company was supplying its own stores and more than 2000 stockists throughout Australia. The majority of these stockists were licensed outlets often found in pharmacies, newsagencies, supermarkets and service stations. They were effectively competing with the other natural chain of outlets – Coles and Woolworths – when they should have been selling to them. Tony Quinn was frank about his assessment. They were operating on a business model that was 40 years old. And I think a lot of people recommended change but the board, the family, knocked it back because they didn’t want to lose their heritage. Tradition killed the business. They couldn’t adapt and change. I guess it is like any family business. There were a lot of people involved in the company but none of them were interested in running it day to day. They didn’t want to be bothered with the hard work of running the business and they didn’t want to put their own money into the thing when things became bad. They just lost interest. Jason Lea . . . had the vision and a plan but nothing has been done since he passed.

On top of that, it was the changing taste of the ‘choco-sumer’ (and Darrell Lea’s inability to keep up) that led to the chocolate maker’s downfall. Darrell Lea was a mass product and anything but fine chocolate. Meanwhile, modern highend chocolatiers like Ma´mor, Cacao, Koko Black and Ganache had grown up around them serving the needs of the sophisticated consumer. True, Rocklea Road was up there with Vegemite as an iconic brand. But the company’s ‘old fogey’ marketing did not keep pace with newcomers. Darrell Lea simply did not have the money to advertise itself out of the mass-commodity chocolate hole it had dug itself into. The lesson was: cater for modern trends and improve productivity or you will die. QUESTIONS

1

2 3 4 5

How does the Three-Circles Model of ownership, family and management (see Figure 7.3) apply to Darrell Lea? Discuss where these circles overlap in the middle – the area in which confusion and problems with family business management emerge. How did the family schism over Jason Lea’s management decisions raise emotions and cause family problems? Do you see any entitlement issues (family members feeling entitled to jobs and to senior management roles)? Some wise advisers suggest that no family member should get a job in the family company until they have achieved promotion outside it. How would that have worked at Darrell Lea? What safeguards would prevent the Quinn family from committing the same errors as previous owners?

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6

Which of the following is false advice? (1) Leave work at work and home at home. (2) You should have job descriptions for all family members. (3) You don’t need to pay family members the market rate because they are earning value elsewhere. (4) Make it clear in advance when family members can enter and exit the business. Sources: Australian Institute of Company Directors 2006. The search for a successor. Company Director Magazine, 1 January 2006, http://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2000-to-2009-back-editions/2006/January/ cover-story-the-search-for-a-successor; Boley, John. Delighting Australians since 1927. Business in Focus, http://www.businessinfocus.com.au/index.php/ 2013/05/darrell-lea; Darrell Lea Timeline. Everyone’s Darrell Lea – since 1927, http://dlea.com.au/about-us/darrell-lea-timeline; Murphy, Damien (2012). Newsmaker: Darrell Lea. Sydney Morning Herald, 14 July 2012, http://www.smh.com.au/small-business/franchising/newsmaker-darrell-lea-201207132219c.html; Robert Gottliebsen (2012). Darrell Lea provides a very modern warning. Smart Company, 10 July 2012, http://www.smartcompany.com.au/ leadership/26795-darrell-lea-provides-a-very-modern-warning-gottliebsen.html#; Staff writer (2013). Darrell Lea: The rebirth of a legend. Sunday Telegraph, 28 April 2013, http://www.dailytelegraph.com.au/news/opinion/darrell-lea-the-rebirth-of-a-legend/story-e6frezz0-1226630697412; Walters, Kath (2012). Darrell Lea collapses: Are family businesses badly managed? Smart Company, 11 July 2012, http://www.smartcompany.com.au/leadership/ 37742-darrell-lea-collapses-are-family-businesses-badly-managed.html; Waters, Cara (2012). The Rocklea Road to Darrell Lea’s demise: Five lessons from the iconic chocolate company. Smart Company, 11 July 2012 http://www.smartcompany.com.au/growth/economy/26798-the-rocklea-road-to-darrelllea-s-demise-five-lessons-from-the-iconic-chocolate-company.html; Wikipedia, Darrell Lea, http://en.wikipedia.org/wiki/Darrell_Lea.

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. exit strategy familiness 1

2

3

nepotism succession

Search (exit strategy). One of the excellent articles you will find is: DeTienne, Dawn R. and Francesco Chirico, ‘Exit strategies in family firms: How socioemotional wealth drives the threshold of performance’, Entrepreneurship: Theory and Practice, November 2013, pp. 1297þ. Search for ‘threshold of performance’ within the article. It appears more than two dozen times. Read especially the paragraph with ‘the level of performance below which the dominant organizational constituents will act to dissolve the organization’. Search (family business) and (entrepreneurship), particularly the interesting article by Martin S. Bressler, Kitty Campbell and Brett Elliott, ‘The reverse family business: An emerging trend in entrepreneurship?’, Academy of Entrepreneurship Journal, 20(2) (2014), pp. 137þ. What is the ‘reverse family business’? Do you know any? Search (nepotism) and (family-owned business). Can you find a positive role that nepotism can play in family businesses?

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ENDNOTES 1 Stalk, G. & Foley, H. (2012). Avoid the traps that can destroy family businesses. [Article]. Harvard Business Review, 90(1), 25–7. 2 Zellweger, T., Sieger, P. & Halter, F. (2011). Should I stay or should I go? Career choice intentions of students with family business background. [Article]. Journal of Business Venturing, 26(5), 521–36. doi: 10.1016/ j.jbusvent.2010.04.001. 3 Transgenerational Entrepreneurship in Family Firms: In association with the Global STEP Project. Cheltenham, UK and Northampton, MA: Elgar, 2011; Cesinger, Beate. Family enterprise in the Asia Pacific. Exploring transgenerational entrepreneurship in family firms. Journal of Small Business & Entrepreneurship 25(2) (2012), 249–51; Habbershon, Timothy G., Mattias Nordqvist & Thomas M. Zellweger. Transgenerational entrepreneurship. In Transgenerational Entrepreneurship: Exploring Growth and Performance in Family Firms across Generations, edited by Mattias Nordqvist & Thomas M. Zellweger, 1–38: In association with the Global Step Project. Northampton, MA and Cheltenham, UK: Elgar, 2010; Jaskiewicz, Peter, James G. Combs & Sabine B. Rau. Entrepreneurial legacy: Toward a theory of how some family firms nurture transgenerational entrepreneurship. Journal of Business Venturing, no. Preprints (2014); Laakkonen, A., J. Kansikas & H. Valtonen. In search of family business continuity: The case of transgenerational family entrepreneurship. International Journal of Entrepreneurship and Small Business 13(2) (2011), 193–207; Li, Weiwen, Yuan Lu, Danming Lin & Kevin Au. Menshy Battery’s Chen family: An overseas educated generation turns to export. In Family Enterprise in the Asia Pacific: Exploring Transgenerational Entrepreneurship in Family Firms, edited by Kevin Au, Justin B. Craig & Kavil Ramachandran, 76–92: In association with the Global STEP Project. Cheltenham, UK and Northampton, MA: Elgar, 2011; Sharma, Pramodita & Jess H. Chua. Asian family enterprises and family business research. Asia Pacific Journal of Management 30(3) (2013), 641–56; Zellweger, Thomas Markus, Robert S. Nason & Mattias Nordqvist. From longevity of firms to transgenerational entrepreneurship of families: Introducing

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family entrepreneurial orientation. Family Business Review 25(2) (2012), 136–55. 4 Hunter, M. (2012). Opportunity, strategy and entrepreneurship: Volume 1: Introduction, The nature of opportunity, time and space, the vision platform, and making connections (Vol. 1), Nova Publishers. 5 Nordqvist, M. & Zellweger, T. (2010). Transgenerational entrepreneurship: Exploring growth and performance in family firms across generations. Cheltenham, UK: Edward Elgar; Au, Kevin, Justin B. Craig & Kavil eds Ramachandran. Family enterprise in the Asia Pacific: Exploring transgenerational entrepreneurship in family firms: In association with the Global STEP Project. Cheltenham, UK and Northampton, MA: Elgar, 2011; Cesinger, Beate. Family enterprise in the Asia Pacific. Exploring transgenerational entrepreneurship in family firms. Journal of Small Business & Entrepreneurship 25, no. 2 (2012), 249–51; Habbershon, Timothy G., Mattias Nordqvist & Thomas M. Zellweger. Transgenerational entrepreneurship. In Transgenerational Entrepreneurship: Exploring Growth and Performance in Family Firms across Generations, edited by Mattias Nordqvist & Thomas M. Zellweger, 1–38: In association with the Global Step Project. Northampton, MA and Cheltenham, UK: Elgar, 2010; Jaskiewicz, Peter, James G. Combs & Sabine B. Rau. Entrepreneurial legacy: Toward a theory of how some family firms nurture transgenerational entrepreneurship. Journal of Business Venturing, no. Preprints (2014); Kellermanns, Franz W. & Kimberly A. Eddleston. Corporate entrepreneurship in family firms: A family perspective. Entrepreneurship: Theory & Practice 30, no. 6 (2006), 809–30; Laakkonen, A., J. Kansikas & H. Valtonen. In search of family business continuity: The case of transgenerational family entrepreneurship. International Journal of Entrepreneurship and Small Business 13(2) (2011), 193–207; Li, Weiwen, Yuan Lu, Danming Lin & Kevin Au. Menshy Battery’s Chen family: An overseas educated generation turns to export. In Family Enterprise in the Asia Pacific: Exploring Transgenerational Entrepreneurship in Family Firms, edited by Kevin Au, Justin B. Craig & Kavil Ramachandran, 76–92: In association with the Global STEP Project.

Cheltenham, UK and Northampton, MA: Elgar, 2011; Newswire, PR. It’s all in the family at the Babson Successful Transgenerational Entrepreneurship Practices (Step) Summits in Europe, Latin America and Asia Pacific. In BabsonSTEP-summits: Y, 2012; Parrish, Bradley D. & Timothy J. Foxon. Sustainability entrepreneurship and equitable transitions to a low-carbon economy. Greener Management International, 55 (2009), 47–62; Sharma, Pramodita & Jess H. Chua. Asian family enterprises and family business research. Asia Pacific Journal of Management 30(3) (2013), 641–56; Zellweger, Thomas Markus, Robert S. Nason & Mattias Nordqvist. From longevity of firms to transgenerational entrepreneurship of families: Introducing family entrepreneurial orientation. Family Business Review 25(2) (2012), 136–55. 6 Gersick, K. E. (1997). Generation to generation: Life cycles of the family business. Cambridge, MA: Harvard Business Press, 149. 7 Habbershon, T. G. & Williams, M. L. (1999). A resource-based framework for assessing the strategic advantages of family firms. Family Business Review, 12(1), 1–25. 8 Danes, S. M., Stafford, K., Haynes, G. & Amarapurkar, S. S. (2009). Family capital of family firms. Family Business Review, 22(3), 199–215; Family business. Drawing young people to the family business. Family Business 20(2) (2009), 8–10; Bjo¨rnberg, Åsa & Nigel Nicholson. Emotional ownership: The next generation’s relationship with the family firm. Family Business Review 25(4) (2012), 374–90; Hubler, Thomas. The soul of family business. Family Business Review 22(3) (2009), 254–8; Pritchard, Angela. Putting family in family business: The role of the chief emotional officer. In Family Business and Social Capital, edited by Ritch L. Sorenson, 178–85: Cheltenham, UK and Northampton, MA: Elgar, 2011; Sorenson, Ritch L. (ed.). Family Business and Social Capital. Cheltenham, UK and Northampton, MA: Elgar, 2011. 9 Sorenson, R. L. & Bierman, L. (2009). Family capital, family business, and free enterprise. [Article]. Family Business Review, 22(3), 193–5. 10 Asia’s family businesses face new challenges. AFP, 2 January 2012, http:// www.abs-cbnnews.com/business/02/01/

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12/asias-family-businesses-face-newchallenges. 11 Credit Suisse. (2011). Asian family businesses report 2011: Key trends, economic contribution and performance. Credit Suisse Emerging Markets Research Institute. 12 Australian Bureau of Statistics (ABS). 8127.0 – Australian Small Business Operators – Findings from the 2005 and 2006 Characteristics of Small Business Surveys, 2005–06. 13 Sharma, Pramodita, Yusof, Mohar, Parada, Maria Jose, DeWitt, Rocki-Lee & Auletta, Nunzia. Global STEP Booklet, Volume II; Sustaining Entrepreneurial Family Businesses: Developing the Core, Expanding the Boundaries (2014). STEP Summit Reports and Resources. Paper 13, http://digitalknowledge.babson.edu/ sumrep/13. 14 Sieger, P., Nason, R., Sharma, P. & Zellweger, T. (2011). STEP Global Booklet. STEP Summit Reports and Resources. Paper 5, http://digitalknowledge. babson.edu/sumrep/5. 15 Carlock, Randel S., Manfred Kets de Vries & Elizabeth Florent-Treacy (2007). Family business. International Encyclopedia of Organizational Studies. 16 Stalk, G. & Foley, H. (2012). Avoid the traps that can destroy family businesses. 17 Passing on the crown, Economist, 4 November 2004. 18 Casilla, J. C., Acedo, F. J. & Moreno, A. M. (2007). International entrepreneurship in family business. Cheltenham, UK: Edward Elgar. 19 Kirchhoff, B. A. & Kirchhoff, J. J. (1987). Family contributions to productivity and profitability in small businesses. Journal of Small Business Management, 25–31 October; Sharma, P., Chrisman, J. J. & Chua, J. H. (1997). Strategic management of the family business: Past research and future challenges. Family Business Review, March, 1–35; Wall, R. A. (1998). An empirical investigation of the production function of the family firm. Journal of Small Business Management, April, 24–32. 20 Brokaw, L. (1992). Why family businesses are best. Inc., March, 20–2. 21 Davis, P. (1983). Realising the potential of the family business. Organisational Dynamics, Summer, 53–4; Chua, J. H., Chrisman, J. J. & Sharma, P. (1999). Defining the family business by behaviour. Entrepreneurship Theory and Practice, Summer, 19–40. 22 Kets de Vries, M. F. R. (1993). The dynamics of family-controlled firms: The

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good news and the bad news. Organisational Dynamics, Winter, 59–71. 23 Berrone, P., Cruz, C. & Gomez-Mejia, L. R. (2014). Family-controlled firms and stakeholder management: A socioemotional wealth preservation perspective. in Melin, L., Nordqvist, M. & Sharma, P. (eds). The SAGE handbook of family business. Sage, 179–95; Berrone, P., Cruz, C., Gomez-Mejia, L. R. & Larraza-Kintana, M. (2010). Socioemotional wealth and corporate responses to institutional pressures: Do family-controlled firms pollute less? Administrative Science Quarterly, 55(1), 82–113. 24 Mason, F. C. (2011). Is sustainability a priority for your company? Family Business, http://www.familybusiness magazine.com/index.php?/freefeature/ month/2011/09. 25 Beckhard, R. & Dyer, W. G. Jr. (1983). Managing continuity in the family-owned business. Organisational Dynamics, Summer, 7–8. 26 South East Asian Entrepreneurs Loosen Family Ties. Financial Management, February 2007. 27 de Vries, K. (1998). The dynamics of family-controlled firms; Cosier, R. C. & Harvey, M. (1998). The hidden strengths in family business: Functional conflict. Family Business Review, March, 75–9 Family Business Review (March 1998), 75–79. 28 Stalk, G. & Foley, H. (2012). Avoid the traps that can destroy family businesses. 29 Davis, P. (1983). Realising the potential of the family business. 47; Hubler, T. (1999). Ten most prevalent obstacles to family business succession planning. Family Business Review, June, 117–22; Michael D. Ensley & Allison W. Pearson. An exploratory comparison of the behavioral dynamics of top management teams in family and nonfamily new ventures: Cohesion, conflict, potency, and consensus. Entrepreneurship Theory and Practice 29(3) (May 2005), 267–84; Paul Westhead & Carole Howorth. Ownership and management issues associated with family firm performance and company objectives. Family Business Review 19 (2006), 301–16; and Michael H. Morris, Jeffrey A. Allen, Donald F. Kuratko & David Brannon. Experiencing family business creation: Differences between founders, nonfamily managers, and founders of nonfamily firms. Entrepreneurship Theory and Practice 34(6) (2010), 1057–84. 30 Holland, P. G. & Boulton, W. R. (1984). Balancing the ‘family’ and the ‘business’ in the family business. Business

Horizons, March/April, 19; Stafford, K., Duncan, K. A., Dane, S. & Winter, M. (1999). A research model of sustainable family business. Family Business Review, September, 197–208. 31 See Kuratko, D. F. (1995). Understanding the succession challenge in family business. Entrepreneurship, Innovation and Change, September, 185–91; see also Heather A. Haveman & Mukti V. Khaire. Survival beyond succession? The contingent impact of founder succession on organizational failure. Journal of Business Venturing 19(3) (May 2004), 437–6; Venter, E., Boshoff, C. & Maas, G. (2005). The influence of successor-related factors on the succession process in small and medium-sized family businesses. Family Business Review, 18(4), December, 283; Brockhaus, R. H. (2004). Family business succession: Suggestions for future research. Family Business Review, 17(2), June, 165; Avila, S. M., Avila, R. A. & Naffziger, D. W. (2003). A comparison of family-owned businesses: Succession planners and non-planners. Journal of Financial Service Professionals, 57(3), May, 85; Steier, L. (2001). Nextgeneration entrepreneurs and succession: An exploratory study of modes and means of managing social capital. Family Business Review, 14(3), September, 259; Shepherd, D. A. & Zacharakis, A. (2000). Structuring family business succession: An analysis of the future leader’s decision making. Entrepreneurship Theory and Practice, 24(4), Summer, 25; Stavrou, E. T. (1999). Succession in family businesses: Exploring the effects of demographic factors on offspring intentions to join and take over the business. Journal of Small Business Management, 37(3), July, 43; Cliffe, S. (1998). Family business: Facing up to succession. Harvard Business Review, 76(3), May/June, 16; Miller, W. D. (1998). Siblings and succession in the family business. Harvard Business Review, 76(1), January/February, 22; Morris, M. H., Williams, R. W. & Nel, D. (1996). Factors influencing family business succession. International Journal of Entrepreneurial Behaviour & Research, 2(3), 68. 32 See Churchill, N. C. & Hatten, K. J. (1987). Non-market-based transfers of wealth and power: A research framework for family business. American Journal of Small Business, Fall, 53–66; Fitzgerald, M. A. & Muske, G. (2002). Copreneurs: An exploration and comparison to other family businesses. Family Business Review, 15z(1), 1–16; Heather A.

Chapter 7: Entrepreneurial families: succession and continuity 251

Haveman & Mukti V. Khaire. Survival Beyond Succession? 33 Anderson, A. R., Jack, S. L. & Dodd, S. D. (2005). The role of family members in entrepreneurial networks: Beyond the boundaries of the family firm. Family Business Review, 18(2), June, 135; Aronoff, C. E. & Astrachan, J. H. (1999). When can family members serve on the board? Nation’s Business, 87(1), January, 56; Davis, P. S. & Harveston, P. D. (1998). The influence of family on the family business succession process: A multigenerational perspective. Entrepreneurship Theory and Practice, Spring, 31–54; Stavrou, E. T. (1999). Succession in family business: Exploring the effects of demographic factors on offspring intentions to join and take over the business. Journal of Small Business Management, July, 43–61; Birley, S. (2002). Attitudes of owner-managers’ children towards family and business issues. Entrepreneurship Theory and Practice, 26(3), 5–19. 34 Anderson, A. R., Jack, S. L. & Dodd, S. D. (2005). The role of family members in entrepreneurial networks: Beyond the boundaries of the family firm, 135; Aronoff, C. E. & Astrachan, J. H. (1999). When can family members serve on the board?, 56; Murphy, P. J. (2005). Working for a family business: A non-family employee’s guide to success. Family Business Review, 18(1), March, 91; Foley, P. J. (2004). The family business compensation handbook: Practical and perceptive advice on rewarding and motivating family and non-family employees. Family Business Review, 17(3), September, 281; Chua, J. H., Chrisman, J. J. & Sharma, P. (2003). Succession and non-succession concerns of family firms and agency relationship with non-family managers. Family Business Review, 16(2), June, 89; Leach, P. (2002). More than family: Non-family executives in the family business. Family Business Review, 15(2), June, 159. 35 See Donald F. Kuratko, Helga B. Foss & Lucinda L. Van Alst. IRS Estate Freeze Rules: Implications for family business succession planning. Family Business

Entrepreneurship

Review (Spring 1994), 61–72; and Joseph H. Astrachan & Roger Tutterow. The effect of estate taxes on family business: Survey results. Family Business Review (Fall 1996), 303–14. 36 For an interesting perspective, see Kathryn Stafford, Karen A. Duncan, Sharon Dane & Mary Winter. A research model of sustainable family business. Family Business Review (September 1999), 197–208; see also Lucia Naldi, Mattias Nordqvist, Karin Sjo¨berg & Johan Wiklund. Entrepreneurial orientation, risk taking, and performance in family firms. Family Business Review 20 (2007), 33–48; and Shaker A. Zahra. Harvesting family firms’ organizational social capital: A relational perspective. Journal of Management Studies 47(2) (2010), 345–66. 37 See Seymour, K. C. (1993). Intergenerational relationships in the family firm: The effect on leadership succession. Family Business Review, Fall, 263–82; Stavrou, E. T. & Swiercz, P. M. (1998). Securing the future of family enterprise: A model of offspring intentions to join the business. Entrepreneurship Theory and Practice, Winter, 19–40; and James P. Marshall, Ritch Sorenson, Keith Brigham, Elizabeth Wieling, Alan Reifman & Richard S. Wampler. The paradox for the family firm CEO: Owner age relationship to succession-related processes and plans. Journal of Business Venturing 21(3) (2006), 348–68. 38 Kuratko, D. F. & Hodgetts, R. M. (1989). Succession strategies for family businesses. Management Advisor, Spring, 22–30. See also Fischetti, M. (1997). The family business succession handbook. Philadelphia: Family Business Publishing Co. 39 Chrisman, J. J., Chua, J. H. & Sharma, P. (1998). Important attributes of successors in family business: An exploratory study. Family Business Review, March, 19–34; and Franz W. Kellermanns, Kimberly A. Eddleston, Tim Barnett & Allison Pearson. An exploratory study of family member characteristics and involvement: Effects

on entrepreneurial behavior in the family firm. Family Business Review 21 (2008), 1–14. 40 Adapted from Fox, H. W. (1982). Quasi-Boards: Useful small business confidants. Harvard Business Review, January/February, 64–72. 41 Ayres, G. R. (1990). Rough family justice: Equity in family business succession planning. Family Business Review, Spring, 3–22; Berenbeim, R. E. (1990). How business families manage the transition from owner to professional management. Family Business Review, Spring, 69–110; Morris, M. H., Williams, R. O., Allen, J. & Avila, R. A. (1997). Correlates of success in family business transitions. Journal of Business Venturing, 12(5), 385–402. 42 Rosenblatt, P. C. Blood may be thicker, but in the boardroom it just makes for sticky business. Psychology Today, July, 55–6; Lansberg, I. (2000). Are you ready for this journey? Family Business Review, Winter 2000: 67–8. 43 Welsch, J. H. M. (1993). The impact of family ownership and involvement on the process of management succession. Family Business Review, Spring, 31–54; and Veroniek Collewaert. Angel investors’ and entrepreneurs’ intentions to exit their ventures: A conflict perspective. Entrepreneurship Theory and Practice 36(4) (2012), 753–79. 44 See Reinardy, D. & Stover, C. (1991). I want to sell my business. Where do I begin?, Small Business Forum, Fall, 1–24. See also Petty, J. W. (1997). Harvesting firm value: Process and results. Entrepreneurship 2000, Chicago: Upstart Publishing Company, 71–94. 45 From O’Conor, C. (1985). Packaging your business for sale. Harvard Business Review, March/April, 52–8; see also Michael S. Long. Valuing the Closely Held Firm. Oxford: Oxford University Press, 2008; and James C. Brau, Ninon K. Sutton & Nile W. Hatch. Dual-track versus single-track sell-outs: An empirical analysis of competing harvest strategies. Journal of Business Venturing 25(4) (2010), 389–402.

» CHAPTER EIGHT DEVELOPING ENTREPRENEURSHIP WITHIN ORGANISATIONS

Many entrepreneurs would remember what it was like working for an employer. The eagerness to get out and do your own thing, the frustration of answering to a hierarchical boss, the hunger to strike it rich in business. . . And chances are, there are employees feeling the same way in your team today. Plenty of them will take the plunge. They’ll start up their own business, quietly on the side perhaps, and then once their venture accumulates sufficient revenues, they’re out the door. But then there are the others. For whatever reason, their entrepreneurial ambitions remain an unfulfilled dream. Their inclination for innovation, though, is still present, and it can be utilised at work. That’s what intrapreneurship is all about.

CHAPTER OBJECTIVES

1

To understand the entrepreneurial mind-set in organisations

2 To define the term ‘intrapreneurship’ in enterprises such as companies and public institutions in the Asia–Pacific 3 To illustrate the need for intrapreneurship and how entrepreneurial management differs from bureaucratic management 4 To describe the obstacles preventing innovation in enterprises 5 To highlight the considerations involved in re-engineering business thinking 6 To identify the relevance of purpose and organisation concepts of an intrapreneurial strategy 7 To highlight the role of social intrapreneurs in creating shared value

J. Adonis, Rise of the ‘intrapreneur’1 Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently . . . you can praise them, disagree with them, quote them, disbelieve them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They invent. They imagine. They heal. They explore. They create. They inspire. They push the human race forward. While some see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.2 ‘Here’s to the Crazy Ones’, The Apple Creed, http://www.apple.com

Entrepreneurship

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Chapter 8: Developing entrepreneurship within organisations 253

THE ENTREPRENEURIAL MIND-SET IN ORGANISATIONS This chapter again brings together two threads – pathways and mind-sets – this time into the organisational context. For some entrepreneurs, working within a larger organisation is a dream come true. They are building a better society and business from the inside out. Ideally, they have resources galore and freedom to innovate. In this chapter we look at entrepreneurship and innovation inside large companies, social enterprises, governments and other institutions. Some authors (perhaps tongue in cheek) have suggested that the combination of entrepreneurship in large organisations is an oxymoron. How can there possibly be innovation in a large corporation or a government bureaucracy? Entrepreneurship is often viewed as a small-business phenomenon, but increasingly it is being applied in the corporate sector. Research and practice have shown that entrepreneurship in large organisations can indeed lead to innovation, new product development, greater wealth creation and economic development.

DEFINING THE INTRAPRENEURSHIP CONCEPT In the US they call it corporate entrepreneurship. Researchers call it entrepreneurial employee activity.3 In this book we call it intrapreneurship (entrepreneurship inside an organisation). Definitions of intrapreneurship have evolved over the last 30 years, particularly in how intrapreneurial businesses differ from other types of businesses. Zahra observed that intrapreneurship includes those ‘formal or informal activities aimed at creating new businesses in established companies through product and process innovations and market developments. These activities may take place at the whole-firm, divisional, functional or project levels, with the unifying objective of improving a company’s competitive position and financial performance’.4 Guth and Ginsberg stress that intrapreneurship encompasses the two domains of new venture creation within existing organisations and the transformation of organisations through strategic renewal.5 Morris et al. also spot this dual nature, calling these two areas corporate venturing and strategic entrepreneurship (see Figure 8.1). Corporate venturing commonly is the adding of new businesses FIGURE 8.1 DEFINING INTRAPRENEURSHIP

Corporate Entrepreneurship

Corporate Venturing • Internal Corporate Venturing • Cooperative Corporate Venturing • External Corporate Venturing

Strategic Entrepreneurship • Strategic Renewal • Sustained Regeneration • Domain Redefinition • Organisational Rejuvenation • Business Model Reconstruction

Source: Morris, M. H., Kuratko, D. F. & Covin, J. G. (2008). Corporate entrepreneurship and innovation. Mason, OH: South-Western/Cengage Learning, 81

254 Part 2: Initiating entrepreneurial ventures

new businesses via equity investments) to the company. Strategic entrepreneurship focuses on large-scale, highly consequential innovations that are adopted in the company’s pursuit of competitive advantage.6 Putting it all together, intrapreneurship is a process whereby an individual (or a group of individuals), in association with an existing organisation, creates a new organisation or instigates renewal or innovation within the organisation. Under this definition, strategic renewal (involving major strategic and/or structural changes), innovation (introducing something new to the marketplace) and corporate venturing (creating new business organisations within the corporate organisation) are all important and legitimate parts of the intrapreneurial process.7 How do countries compare in their levels of intrapreneurship? The Global Entrepreneurship Monitor (GEM) measures the prevalence of what these scientists call ‘entrepreneurial employee activity’ (EEA), defining it as the prevalence of employees actively involved in idea development and implementing that new activity with an organisation. By this definition, entrepreneurial employees are not as numerous as regular business entrepreneurs. Table 8.1 shows the comparative rates for some Asia–Pacific countries. In the developed countries, entrepreneurial employee activity (EEA) is about half of the rate of total entrepreneurial activity (TEA). In GEM’s 53-country sample, on average EEA is more prevalent in innovation-driven economies (4.6 per cent) than in efficiency-driven economies (1.8 per cent), while in factor-driven economies EEA is extremely rare (0.3 per cent). (or

portions

TABLE 8.1

of

ENTREPRENEURIAL EMPLOYEE ACTIVITY IN ASIA–PACIFIC COUNTRIES, 2013 ENTREPRENEURIAL EMPLOYEE ACTIVITY (EEA) (% OF ADULT POPULATION) (2014)

TOTAL ENTREPRENEURIAL ACTIVITY (TEA) (% OF ADULT POPULATION) (2014)

Australia

9.0

13.1

Canada

5.0

13

China

0.5

15.5

Indonesia

0.5

14.2

Japan

1.0

3.87

Korea

2.4 (2013)

7.0

Malaysia

0.4

5.9

Pakistan

0.1

12

Philippines

0.6

18.4

Russia

0.5

4.7

Singapore

5.0

Taiwan

7.0

8.5

Thailand

2.0

23.3

United States

6.0

13.8

Vietnam

0.5

15.3

11

Source: Slavica Singer, Jose´ Ernesto Amoro´s, Daniel Moska Arreola & Global Entrepreneurship Research Association (GERA), ‘Global Entrepreneurship Monitor 2014 Global Report’, http://www.gemconsortium.org/docs/3616/gem-2014-global-report. Used with permission.

Chapter 8: Developing entrepreneurship within organisations 255

Interesting to note is that intrapreneurship is not restricted to private, commercial activities. Almost two-thirds of EEA takes place in the private for-profit sector and one-third in the not-for-profit and government sectors.

ENTREPRENEURIAL EMPLOYEE ACTIVITY AT 3M 3M Company (formerly Minnesota Mining and Manufacturing Company) is an American company ENTREPRENEURIAL with a worldwide presence that produces over 55 000 products, including adhesives, abrasives and laminates, electronic circuits and displays and pharmaceuticals. 3M is famous around the globe, not only because of its portfolio of products but also because of its ‘innovation-based EDGE culture’ leading to entrepreneurial employee activities. 3M’s contributions to modern life include magnetic sound and video recording tape, offset printing plates, fabric protector, translucent dental braces, synthetic ligaments for knee surgery, heavy-duty reflection sheet for construction signs and of course Post-it notes. Here are some of their stories. Andy Wong was the manager of 3M’s Optical Systems. He developed a project around a new technology related to light control film between 1989 and 1992. After two unsuccessful launches and continuous technical and market failures, the project was under threat. However, Wong’s ability to create a strong team, redesign the marketing strategy and construct a final prototype that fits with the demand from the ‘real’ market eventually enabled him to refloat the project and restore the credibility of the unit. Under the 3M slogan ‘to stimulate ordinary people to produce extraordinary performance’, today all the technologies related to light control films are under the umbrella of a successful business unit called Vikuiti that has one of the largest market shares in the industry. After his intrapreneurial performance, Andy Wong was promoted to vice-president of 3M’s optical systems division. One of the founders of 3M, Francis G. Oakie, had an idea to replace razor blades with sandpaper. He believed men could rub sandpaper on their face rather than use a sharp razor. He was wrong and the idea failed, but his ideas evolved until he developed waterproof sandpaper for the auto industry, a blockbuster success. Arthur Fry invented Post-it notes based on a particular adhesive that his colleague, Spencer Silver, had developed. While Fry initially used it for personal purposes (to have a bookmark for his church hymnal that would stick without damaging the hymnal), the potential for broader use was recognised within 3M and Post-it notes were put into production a few years later. 3M follows a set of innovative rules that encourage employees to foster ideas. The key rules include the following: •

•

• •

• •

Don’t kill a project: If an idea can’t find a home in one of 3M’s divisions, an employee can devote 15 per cent of their time to prove it is workable. For those who need seed money, as many as 90 Genesis grants of $50 000 are awarded each year. Tolerate failure: Encouraging plenty of experimentation and risk-taking allows more chances for a new product hit. The goal: divisions must derive 25 per cent of sales from products introduced in the past five years. The target may be boosted to 30 per cent in some cases. Keep divisions small: Division managers must know each employee’s first name. When a division gets too big, perhaps reaching $250 million to $300 million in sales, it is split up. Motivate the champions: When a 3M employee has a product idea, they recruit an action team to develop it. Salaries and promotions are tied to the product’s progress. The champion has a chance to some day run their own product group or division. Stay close to the customer: Researchers, marketers and managers visit customers and routinely invite them to help brainstorm product ideas. Share the wealth: Technology, wherever it is developed, belongs to everyone.

Technology-based companies like Google, Sony, Hewlett Packard and Intel also have policies to support intrapreneurs. These employees – mainly those in engineering activities – receive support to develop new products. This strategy has already reaped benefits; for instance Gmail resulted from this initiative. Likewise, the development of the Sony Playstation would not have occurred without Sony intrapreneur Ken Kutaragi. Sources: Mitchell, R. (1989), ‘Masters of innovation’, Business Week, April, 58–63; 3M Annual Report, 1995; and Kanter, R. M., Kao, J. & Wiersema, F. (1997), Innovation: Breakthrough ideas at 3M, DuPont, Pfizer & Rubbermaid, New York: HarperCollins; Von Hipple, E., Thomke, S. & Sonnack, M. (1999), ‘Creating breakthroughs at 3M’, Harvard Business Review, Sep–Oct, 47–57; Bartlett, C. A. & Mohammed, A., ‘3M optical systems: Managing corporate entrepreneurship’, Harvard Business School Case No. 395017, revision date 28 May 1999. For more information about 3M and Vikuiti see http://solutions.3m.com/wps/portal/3M/en_US/VikuitiHome/Landing-Page.

256 Part 2: Initiating entrepreneurial ventures

Intrapreneurs are a different breed of entrepreneur. Guy Kawasaki once said, ‘Entrepreneurs think intrapreneurs have it made: ample capital, infrastructure, salespeople, support people and an umbrella brand. Intrapreneurs do not have it better. At best, they simply have it different. Indeed, they probably have it worse because they are fighting against ingrained, inbred and inept management’.8 Table 8.2 compares the characteristics and skills of the intrapreneur with those of the traditional manager and the entrepreneur.9 TABLE 8.2

WHO IS THE INTRAPRENEUR?

CHARACTERISTIC

TRADITIONAL MANAGER

ENTREPRENEUR

INTRAPRENEUR

Primary motives

Wants promotion and other traditional business rewards; power motivated

Wants freedom; goal-oriented, self-reliant and self-motivated

Wants freedom and access to company resources; goal-oriented and self-motivated, but also responds to business rewards and recognition

Tendency to action

Delegates action; supervising and reporting take most energy

Gets hands dirty; may upset employees by suddenly doing their work

Gets hands dirty; may know how to delegate but, when necessary, does what needs to be done

Attitude towards courage and destiny

Sees others being in charge of their destiny; can be forceful and ambitious but may be fearful of others’ ability to do them in

Self-confident, optimistic and courageous

Self-confident and courageous; many are cynical about the system but optimistic about their ability to outwit it

Focus of attention

Primarily on events inside the company

Primarily on customers and the marketplace

Both inside and outside; sells insiders on needs of venture and marketplace but also focuses on customers

Attitude towards risk

Cautious

Likes moderate risk; invests heavily but expects to succeed

Likes moderate risk; generally not afraid of being fired, so sees little personal risk

Source: Kathryn Hegar, Modern human relations at work (Cengage Learning, 11th edn), p. 285, ª 2012 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage.com/permissions.

Pinchot defines an intrapreneur as a ‘person who focuses on innovation and creativity and who transforms a dream or an idea into a profitable venture, by operating within the organisational environment’.10 They pursue opportunity, acquire resources, take risks, are proactive and innovative.11 Intrapreneurs are not necessarily the inventors of new products or services, but they are the people who can turn ideas or prototypes into profitable realities. They are the people behind a product or service. They are team builders with a commitment and a strong drive to see their ideas become a reality. Most intrapreneurs begin their ‘intraprise’ with an idea. This idea typically starts as a vision, often referred to as the ‘daydreaming phase’. Here the intrapreneur mentally goes through the process of taking the idea to fruition. Different pathways are thought through and potential obstacles and barriers are mentally examined. Initially, the intrapreneur is the general manager of a new business that does not yet exist. In the beginning, the individual may specialise in one area, such as marketing or research and development, but once the intraprise is started, the intrapreneur quickly begins to learn all the project’s facets, seeks intra-capital and soon becomes a generalist with many skills. Pinchot famously describes intrapreneurs as ‘dreamers who do’.12 They tend to be action-oriented. They can move quickly to get things done. They are goal-oriented, willing to do whatever it takes to

Chapter 8: Developing entrepreneurship within organisations 257

achieve their objectives. They are a combination of thinker, doer, planner and worker. They combine vision and action. Dedication to the new idea is paramount. As a result, intrapreneurs often expect the impossible from themselves and consider no setback too great to make their venture successful. They are self-determined goal setters who go beyond the call of duty in achieving their goals. When faced with failure or setback, intrapreneurs are optimistic. First, they do not admit they are beaten; they view failure as a temporary setback to be learned from and dealt with. It is not seen as a reason to quit. Second, they view themselves as proprietors of their own destiny. They do not blame their failure on others, but instead focus on learning how they might have done better. By objectively dealing with their own mistakes and failures, intrapreneurs learn to avoid making the same mistakes again and this, in turn, is part of what helps make them successful.

THE RISE OF INTRAPRENEURS The interest in entrepreneurial thinking in large organisations started to develop in the mid-1980s. In 1982, in an article in The Economist called ‘The coming entrepreneurial revolution’, Norman Macrae popularised the term ‘intrapreneur’ in that job growth would come either from small companies or from those bigger companies that managed to split themselves into smaller and smaller profit centres, which would need to become more and more entrepreneurial.13 The global economy is creating profound changes for institutions, businesses and industries throughout the world. Companies and enterprises everywhere must re-examine their purposes and strategies carefully to satisfy their multiple stakeholders. In response to rapid, discontinuous and significant changes, many established companies have restructured their operations in fundamental and meaningful ways in order to become more entrepreneurial and responsive to change. In fact, after years of restructuring, some of these companies bear little resemblance to their ancestors in their business scope, culture or competitive approach.14 Peter Drucker, the renowned management expert, described the movement in terms of the entrepreneurial economy and highlighted15 four major developments that explained its emergence. First, the rapid evolution of knowledge and technology promoted the use of high-tech entrepreneurial start-ups. Second, demographic trends such as two-wage-earner families, continuing education of adults and the ageing population added fuel to the proliferation of newly developing ventures. Third, the venture capital market became an effective funding mechanism for entrepreneurial ventures. Fourth, awakening in the US and spreading throughout the developed world, industry began to learn how to manage entrepreneurship.16 For larger incumbent businesses in an industry, the constant challenge is to keep pace with the winds of change. Major changes that can threaten an industry can occur on two fronts.17 First, the core assets of the industry can be undermined. For instance, the printing industry has been under sustained pressure from the digital sector as customers are lured away from books (the main asset of the printing industry) and instead attracted to the digital form of print downloaded onto e-readers. Similar change has occurred in the music industry with the shift to digitisation away from vinyl records and compact discs. The second area of industry risk is when the core activities of the incumbent businesses are no longer desirable to consumers. For example, the travel sector is facing major change as consumers increasingly access deals and make direct contacts with suppliers via the Internet. The activities of travel agents are becoming less valued by the end user as consumers do it themselves. Similar pressures are felt by DVD movie hire businesses as the value of a short-term hiring service is replaced by the convenience of Internet downloads.

How to be an intrapreneur in Asia when the leader is notoriously regimental? On CourseMate Express read about how not to lose face.

258 Part 2: Initiating entrepreneurial ventures

Propelled by the changes of the new millennium, entrepreneurship is now a major force in world business and this has led to an increased desire for this type of activity inside large enterprises. Although some researchers have concluded that entrepreneurship and bureaucracies are mutually exclusive and cannot coexist,18 others have described entrepreneurial ventures within the enterprise framework.19 Intrapreneurial techniques have been used (with success and with failure) throughout the world. Steven Brandt puts it this way: Ideas come from people. Innovation is a capability of the many. That capability is utilised when people give commitment to the mission and life of the enterprise and have the power to do something with their capabilities. Non-commitment is the price of obsolete managing practices, not the lack of talent or desire. Commitment is most freely given when the members of an enterprise play a part in defining the purposes and plans of the entity. Commitment carries with it a de facto approval of and support for the management. Managing by consent is a useful managing philosophy if more entrepreneurial behaviour is desired.20

DOES INTRAPRENEURSHIP EXIST IN ASIA? Traditionally, Asian businesses have been viewed as bureaucratically structured public companies, or as family-owned patriarchal organisations – two corporate forms that on the face of it might hinder the growth of an intrapreneurial culture. However, if one looks a little closer, intrapreneurship has in fact been one of the major ways in which Asian companies have been IN PRACTICE able to develop and grow. In fact, one could observe that much of the national economic development that took place during the 1980s and 1990s within the Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) was due to corporate intrapreneurship that brought great innovation and diversity to Asian firms. Modern intrapreneurship in Asia probably has its roots in the European colonial trading companies at the beginning of the last century, which controlled the majority of business dealings between manufacturers and distributors. The colonial companies expanded primarily through the creation of new divisions that were set up by a manager with great freedom to exercise discretion, take initiative, and promote innovation. Their job was to enter into new markets and industries, and to grow their operations into conglomerates and monopolies. From trading and retail, then local assembly, they eventually became exporters, i.e. Harpers, Inchcape, Hagemeyer and the Borneo Companies for example. Similarly, many of the Chinese business groups grew in that manner. Most had humble beginnings as a trader leading to direct investment in industrial activities, later vertically integrating into downstream activities, real estate and property, and even banking and financial services. Each division had a different member of the family at the helm, e.g. the Salim Group (cement, automobiles, flour, food, chemicals, banking, property and insurance) in Indonesia, the Kuok (plantations, flour, shipping, hotels, mining, computer services, retail and film distribution) and Hong Leong (banking, insurance, automobile franchises, construction, hardware and manufacturing) groups in Malaysia, and the Charoen Pokphand (animal feed, poultry, chemicals, automobiles, telecommunications, textiles, property and retail) group in Thailand for example. Like everywhere, initiating intrapreneurship within any Asian firm requires both a bright idea and a champion. The problem is that a conservative patriarch typically controls the scope of acceptable new ideas. The opportunity environment is seen differently due to his cultural values. Consequently some firms will be more open to new ideas than others and this is why many firms within the region fail to grow, and actually decline. The chairman/CEO must see these ideas as opportunities and this to a great extent depends on cultural values and where they see their firm’s role within the environment. Few employees in any Asian firm will have the chance to advocate new ideas to the decision makers. Within the Chinese business groups, most pioneers of new divisions were either a direct relative, or related by marriage. Only in the last few years have ASEAN-based firms selected candidates based on entrepreneurial qualities of proven leadership, creativity, and ability to manage a project. The actions of moving resources into new activities of a firm may often leave other employees with a feeling of insecurity, where they may feel that cooperating with the intrapreneur is contrary to their personal interests. Many firms that need to transform within the changing global environment find it difficult to break away from the top-down orientation that initially brought success when the founder started and grew the business.

ENTREPRENEURSHIP

cont.

»

Chapter 8: Developing entrepreneurship within organisations 259

cont.

Intrapreneurship in Asia has its dark side. The autonomy that intrapreneurship may bring to an individual or group opens up possibilities of taking advantage of the firm, which can lead to abuse of trust and corrupt dealings. Currently many state-owned enterprises face this problem where any new company or division that is formed drains finances and fails because of the conflict between employee and personal interests. Intrapreneurship has also encouraged a cowboy mentality where firms enter industries that they don’t really understand, leading to losses and even bankruptcies. One just has to drive around the region and see all the failed construction projects and closed down factories that had short operational existences. So the opportunities to become intrapreneurs within Asian firms are paradoxical. Intrapreneurship made many companies what they are today, yet at the same time, opportunities are very limited because the low level of trust perceived in employees without family connections and long periods of service within the firm. Nonetheless, more and more businesses in our region are realising the importance of nurturing intrapreneurs to help drive growth, as revealed in a 2014 survey of Asia–Pacific senior managers and business owners about how to foster intrapreneurship among employees and workers. What do these owners and managers consider to be the top strategies? •

•

•

• •

• • •

Singapore: Almost half (49 per cent) of business owners and senior managers in Singapore say flexible work conditions are a key to fostering ‘intrapreneurship, followed by mixing selected staff from different functions (40 per cent); skills updating programs (40 per cent); and access to senior management (39 per cent). Australia: The most popular tools to foster intrapreneurship were programs to keep workers’ skills fresh (51 per cent), co-mingling of staff from different departments (45 per cent) and flexi-work policies (41 per cent). Forty per cent of Australian owner-managers identified the consultancy sector as a high potential sector for entrepreneurs. A shock result was that just 11 per cent identified an entrepreneurial streak among their female workers. India: In India, 48 per cent of Indian owner-managers think flexible working is key. More than half want skills updating programs (55 per cent); mixing staff from different functions (36 per cent); and access to senior management (32 per cent). Hong Kong: Flexible work (47 per cent) is most important, followed by mixing staff from different functions (46 per cent); skills updating programs (42 per cent); followed by formal innovation programs (29 per cent). China: 46 per cent of Chinese respondents report that flexible working is key to fostering innovation. But 37 per cent believe access to senior management is a key innovation driver; 36 per cent see IT systems/software as the richest intrapreneurial sector. Taiwan: 41 per cent in Taiwan believe that access to senior management is a key innovation driver compared with just 28 per cent in Hong Kong. Japan: 47 per cent of Japanese respondents report that skills updating programs are key to fostering innovation. India: 30 per cent of Indian businesses identify travel and tourism as a high potential sector for entrepreneurs. Sources: Regus (2014), Entrepreneurship: Flourishing in tough conditions, http://press.regus.com/united-states/ entrepreneurship-flourishing-in-tough-conditions; Murray Hunter (2012), University of Northern Malaysia, http://www.orbus.be/info/important_news_july_extra_016-2012.htm. Copyright ª 2014 by Murray Hunter. Used by permission.

RE-ENGINEERING ORGANISATIONAL THINKING What can a company do to re-engineer its thinking to foster the entrepreneurial process? First, it needs to examine and revise its management philosophy. Many enterprises have obsolete ideas about cooperative cultures, management techniques and the values of managers and employees. Unfortunately, doing old tasks more efficiently is not the answer to new challenges; a new culture with new values has to be developed.21 Bureaucrats and controllers must learn to coexist with – or give way to – designers and innovators. To establish an intrapreneurial mind-set, organisations (whether in the commercial world or in government bureaucracies) need to provide the freedom and encouragement required for employees to develop their ideas.22 This is often a problem in larger corporatised enterprises because many top managers do not believe that entrepreneurial ideas can be nurtured and developed in their

260 Part 2: Initiating entrepreneurial ventures

environment. They also find it difficult to implement policies that encourage freedom and unstructured activity. But managers need to develop policies that will help innovative people reach their full potential. Gifford Pinchot, whose 1985 book Intrapreneuring became a classic in the field, proposed that corporate leaders should test their view of the company with the following questions: • Does your company encourage entrepreneurial thinking? Will individuals receive the company’s blessing for their self-appointed idea creations? Some companies foolishly try to appoint people to carry out an innovation when, in fact, the ideas must surface on their own. • Does your company provide ways for innovators to stay with their ideas? When the innovation process involves switching the people working on an idea – that is, handing off a developing business or product from a committed innovator to whoever is next in line – that person often is not as committed as the originator of the project. • Are people in your company permitted to do the job in their own way, or are they constantly stopping to explain their actions and ask for permission? Some organisations push decisions up through a multilevel approval process so that the doers and the deciders never even meet. • Has your company evolved quick and informal ways to access the resources to try new ideas? Innovators usually need discretionary resources to explore and develop new ideas. Some companies give employees the freedom to use a percentage of their time on projects of their own choosing and set aside funds to explore new ideas when they occur. Others control resources so tightly that nothing is available for the new and unexpected – the result is nothing new. • Has your company developed ways to manage many small and experimental innovations? Today’s business cultures favour a few well-studied, well-planned attempts to hit a home run. In fact, nobody hits a home run every time; it is better to make more frequent attempts, with less careful and expensive preparation for each. • Is your system set up to encourage risk taking and to tolerate mistakes? Innovation cannot be achieved without risk and mistakes. Even successful innovation generally begins with blunders and false starts. • Are people in your company more concerned with new ideas or with defending their turf? Because new ideas usually cross the boundaries of existing patterns of organisation, a jealous tendency to ‘turf protection’ blocks innovation. • How easy is it to form functionally complete, autonomous teams in your business environment? Small teams with full responsibility for developing an innovation solve many of the basic problems, yet some companies resist their formation.23 If these questions can be answered positively, the result suggests an organisational philosophy that supports intrapreneurial behaviour. A number of negative responses will challenge an organisation to rethink its approach to creating an intrapreneurial environment. To further develop your awareness of an intrapreneurial company try out the exercise ‘The ideal business for an intrapreneur’ at the end of this chapter. Another way to create an innovative intrapreneurial atmosphere is to approach it tactically. Managers with foresight can use the corporate entrepreneurship tactics in Table 8.3 as hands-on guidelines for developing the necessary innovative philosophy. When these are followed, they create an environment conducive to and supportive of potential entrepreneurial thinking. The result is a business philosophy that supports innovative behaviour.

Chapter 8: Developing entrepreneurship within organisations 261

TABLE 8.3

CORPORATE ENTREPRENEURSHIP (CE) TACTICS

Use demonstration projects Uncover specific past CE-related activities that have been successful, easy wins that motivate employees into action. Highlight how they supported the business case, the employees involved, the CE case and their successful outcomes.

Use cross-functional working groups Teams from across the organisation who have come together with a shared purpose or problem to resolve. They can be small or large and consist of same or different discipline employees of same or different seniority, depending on the nature of the problem.

Open forums and workshops Run open forums where employees can discuss initiatives, concerns, ideas and relevant issues. These should be available to middle- to lowerranking employees, and ensure that no consequences of discussions can backfire on employees.

Tailor the business case Create a bespoke business case for CE that is specific to your organisation’s business plan (same objectives, same long-term targets). Find places to insert your CE objectives into the business plan, with supporting sections for each department that show how the objectives fit into the whole picture.

Education and skills development Educational and skills development packages on CE and bespoke aspects for specific employee groups. Training manuals for new starters or promotions, intranet-based communications on latest initiatives, competitions testing employees’ knowledge on CE (where pre-reading is needed), away day training sessions on specific aspects of CE, conference attendance for champions or directors to be educated by peers in the industry.

Individual opportunism Bring people close to the action, to see for themselves (internally or externally) what CE is about through away days, running specific activities or campaigns, internal talks, talks from external people, opportunities to volunteer, champions network and so on.

Buddy system For your network of champions or volunteers, assign a new starter with a more experienced member of staff, either more experienced in the business or in CE, to act as a mentor for their activities. A buddy gives them support from an employee with experience and relevance, and gives them a sounding board. This alliance can also provide political benefits, such as access to a higher ranking employee or access to a different part of the business.

Mobilise middle managers Middle managers can be powerful allies or saboteurs as they can block access, take away permission for junior members of staff to get involved, or open doors for the CE team. It is critical to focus on all levels of employees when engaging them in corporate responsibility.

Create a visible CE team The CE team (core team and directors with responsibilities) need to be visible in the business so that employees understand they are core to the business itself. The team will also need to build credibility and show that they can consistently deliver value to the business. A credible and reliable CE team initiates trust in employees.

Reward and recognise Use the ‘total reward package’ approach: reward not just on pay but recognition, skills development, identity enforcement, promotion and so on. Some employees will be motivated by personal reward (whether political or promotion criteria), for others it will be emotional reward (belonging, believes in the issues being addressed) and others business success (solving a business need, enabling a business target).

Create a champions network An informal network of employees across the business (top to bottom and across all departments) who are interested in CE and want to get involved. Ideally, have a tiered approach of top (the Board) down through to all levels of employment. Start with those already engaged and help them network with other employees across the business to build the network – some companies allow senior managers/directors to nominate employees (usually middle managers) to get involved. Source: Revised and adapted from: Dougherty Centre for Corporate Responsibility. (2011). Engaging employees in corporate responsibility. In N. Exter (ed.), How-to guide (6th edn). Cranfield University School of Management, 27–35, published by Cranfield University School of Management, ª 2011.

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OBSTACLES TO INTRAPRENEURSHIP The obstacles usually reflect the ineffectiveness of traditional management to adapt to new-venture development. Although it is unintentional, the adverse impact of particular old-style techniques can be so destructive that the individuals within an enterprise will tend to avoid intrapreneurial behaviour. The top barriers for intrapreneurs are: management resistance to change in organisations; corporate bureaucracy that slows down project approval; refusal to allocate resources to new ideas; lack of training and support for employees; low rewards for success coupled with high costs of failure; and performance evaluation based solely on job descriptions.24 Table 8.4 provides a list of traditional management techniques, their adverse effects (when the technique is rigidly enforced), and recommended actions to change or adjust the practice. TABLE 8.4

SOURCES OF AND SOLUTIONS TO OBSTACLES TO CORPORATE INNOVATION

TRADITIONAL MANAGEMENT PRACTICES

ADVERSE EFFECTS

RECOMMENDED ACTIONS

Enforce standard procedures to avoid mistakes

Innovative solutions blocked, funds misspent

Make ground rules specific to each situation

Manage resources for efficiency and ROI

Competitive lead lost, low market penetration

Focus effort on critical issues (e.g., market share)

Control against plan

Facts ignored that should replace assumptions

Change plan to reflect new learning

Plan for the long term

Nonviable goals locked in, high failure costs

Envision a goal, then set interim milestones, reassess after each

Manage functionally

Entrepreneur failure and/or venture failure

Support entrepreneur with managerial and multidiscipline skills

Avoid moves that risk the base business

Missed opportunities

Take small steps, build out from strengths

Protect the base business at all costs

Venturing dumped when base business is threatened

Make venturing mainstream, take affordable risks

Judge new steps from prior experience

Wrong decisions about competition and markets

Use learning strategies, test assumptions

Compensate uniformly

Low motivation and inefficient operations

Balance risk and reward, employ special compensation

Promote compatible individuals

Loss of innovators

Accommodate ‘boat rockers’ and ‘doers’

Source: Reprinted by permission of Elsevier from Hollister B. Sykes & Zenas Block, ‘Corporate venturing obstacles: Sources and solutions,’ Journal of Business Venturing (Winter 1989), 161. Copyright ª 1989 by Elsevier Science Publishing Co., Inc.

Understanding the obstacles is critical to fostering intrapreneuring because they are the foundation points for all other motivational efforts. To gain support and foster excitement for newventure development, managers must remove the perceived obstacles and seek alternative management actions.25 After recognising the obstacles, managers need to adapt to the principles of successful innovative companies. James Brian Quinn, an expert in the innovation field, found the following common factors in large companies that are successful innovators.

Chapter 8: Developing entrepreneurship within organisations 263

• Atmosphere and vision: Innovative companies have a clear-cut vision of, and the recognised support for, an innovative atmosphere. • Orientation to the market: Innovative companies tie their visions to the realities of the marketplace. • Small, flat organisations: Most innovative companies keep the total organisation flat and project teams small. • Multiple approaches: Innovative managers encourage several projects to proceed in parallel development. • Interactive learning: Within an innovative environment, learning and investigation of ideas cut across traditional functional lines in the organisation. • Gumboot factory26 or skunkworks: A skunkworks operates with autonomy within a large organisation. Every highly innovative enterprise uses groups that function outside traditional lines of authority. This eliminates bureaucracy, permits rapid turnaround and instils a high level of group identity and loyalty.27 As Pinchot says, creativity and innovation are fuelled by the intelligence of people who have the freedom and right to express their ideas.28 Intrapreneurship relies less on hierarchy and more on shared vision and less on rules, more on choices and less on command. Teams can be organised around the mission to design ever-better ways to conduct enterprises and create a stream of exchangeable value.29 Reduction of organisational hierarchy is also important to promote intrapreneurship. It is necessary to eliminate organisational structures that obscure personal responsibility and homogenise individual actions.30

NOT FOR BUSINESSES ONLY: PUBLIC SECTOR ENTREPRENEURSHIP Citizens and politicians around the world regularly lament the absence of entrepreneurial behaviour in the public sector. The need to be entrepreneurial and innovative also applies to institutions such as governments and other public sector organisations. Drucker once observed that public institutions ‘need to be entrepreneurial and innovative fully as much as any business does’. Throughout the world, governments and other public institutions have been struggling with how to become more entrepreneurial. This is not easy considering the centuries-long system of entrenched bureaucracies that resist change. Entrepreneurship, he believed, was as much a public sector imperative as a private sector one31 (see Table 8.5). This has led Hisrich and Al-Dabbagh to advocate public sector entrepreneurship defined as ‘an individual or group of individuals undertaking activities to initiate change by adapting, innovating and assuming risk, and recognizing that personal goals and objectives are less important than generating results for the organization’. They have termed the word governpreneurship to describe this type of activity within governments.32

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TABLE 8.5

COMPARISON OF PRIVATE, CORPORATE AND PUBLIC ENTREPRENEURS PRIVATE (INDEPENDENT) ENTREPRENEUR

CORPORATE ENTREPRENEUR

PUBLIC SECTOR ENTREPRENEUR

Objectives

Freedom to discover and exploit profitable opportunities; independent and goal oriented; high need for achievement

Requires freedom and flexibility to pursue projects without being bogged down in bureaucracy; goal oriented; motivated but is influenced by the corporate characteristics

An individual who is motivated by power and achievement; undertakes purposeful activity to initiate, maintain or aggrandise, one or more public sector organisations; not constrained by profit

Focus

Strong focus on the external environment; competitive environment and technological advancement

Focus on innovative activities and orientations such as development of new products, services, technologies, administrative techniques, strategies and competitive postures; concentrates on the internal and external environment

Aims to create value for citizens by bringing together unique combinations of public and/or private resources to exploit social opportunities; learns to use external forces to achieve internal change

Innovation

Creates value through innovation and seizing the opportunity without regard to resources (human and capital); produces resources or endows existing resources with enhanced potential for creating wealth

A system that enables and encourages individuals to use creative processes that enable them to apply and invent technologies that can be planned, deliberate, and purposeful in terms of the level of innovative activity desired; instigation of renewal and innovation with that organisation

Public managers are entrepreneurial in the way they take risks with an opportunistic bias toward action and consciously overcome bureaucratic and political obstacles their innovations face

Opportunity

Pursues an opportunity, regardless of the resources they control; relatively unconstrained by situational forces

Pursues opportunities independent of resources they currently control; doing new things and departing from the customary to pursue opportunities

Uses every opportunity to distinguish their public enterprise and leadership style from what is in the public sector; understand the business as well as the opportunity for business growth and development

Risk taking

Risk taking is a prime factor in the entrepreneurial character and function; assumes significant personal and financial risks but attempts to minimise them

Moderate risk taker; recognises that risks are career related

Calculate risk taker; takes relatively big organisational risks without taking big personal risks

Character and skills

Self-confident; strong knowledge of business

Self-confident; self-belief that they can manipulate the system; strong technical or product knowledge; good managerial skills

Self-confident; high tolerance of ambiguity; strong political skills

Source: Kearney, C., Hisrich, R. D. & Roche, F. (2007). A conceptual model of public sector corporate entrepreneurship. International Entrepreneurship and Management Journal, 4(3), 295–313. Republished with permission of Springer via Copyright Clearance Center, Inc.

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NEW ZEALAND’S SUCCESS IN COMMERCIALISING GOVERNMENT COMPANIES For its small size, New Zealand has about 500 organisations directly involved in ENTREPRENEURSHIP commercialising innovation: science, engineering and technology companies, laboratories, campuses, workshops, studios and factories and 50 major institutions including universities, research institutes, polytechnics and private sector companies. During the 1980s, New Zealand IN PRACTICE government departments with a strong trading function were corporatised or privatised, on the premise that such services could be more efficiently provided by commercially oriented organisations, rather than subject to ministerial control and government interference. This has been a great success and provides an important example of intrapreneurship. MetService. New Zealand’s weather forecasting services began in 1861 as part of the then government’s Marine Department. In 1992 responsibility for weather forecasting was transferred to the newly incorporated SOE ‘MetService’ whose main business activity involved forecasting and communicating weather-related information. MetService’s vision was to be a recognised leader in weather and information presentation services, to be profitable and well managed, with enthusiastic and highly skilled staff dedicated to the success of the company and growing worldwide through customer appreciation of its valuable and innovative services. With projects such as turbulence forecasting over the Himalayan Mountains for Qantas Airways, low-cost weather systems for isolated areas using mobile phone technology, heat stress and pasture growth indices for New Zealand’s agricultural industry, and energy forecasts for various power stations in the UK, MetService gained recognition as a successful, innovative and entrepreneurial organisation. New Zealand Post. NZ Post had provided mail services for more than 160 years, but in 1987 the postal side of the business became a commercial, profit-oriented entity. There was an awareness of the decreasing trend in traditional mail, so the decision was made to diversify business around a central theme of connecting people. With projects such as international consultancy to other postal administrations, electronic systems for the archive and retrieval of customer documents, electronic mapping of customer delivery points and agency services enabling online payment of fees for more than 80 different organisations, NZ Post was increasingly viewed as a successful and proactive organisation. Consistent with this strategy of pursuing entrepreneurial opportunities, NZ Post took the rather bold and controversial step of entering New Zealand’s banking industry in 2001 with the establishment of Kiwibank. Spark New Zealand. Formerly known as Telecom New Zealand, the company was carved out of the government-run New Zealand Post Office in 1987 and privatised in 1990. To further speed privatisation, in 2008 the company was chopped up into three operations to correspond to the ‘local loop unbundling’ initiatives by government. This resulted in Telecom Retail; Telecom Wholesale; and Chorus (network infrastructure). Finally, the companies became separately listed on the stock exchange, thus ending once and for all any remnants of monopoly. In 2014 Telecom Retail changed its name to Spark New Zealand. Source: Adapted from Luke, B. & Verreynne, M-L. (2006), ‘Strategic entrepreneurship in the public sector: Fact or farce?’, Regional Frontiers of Entrepreneurship Research 2006, Third AGSE International Entrepreneurship Research Exchange, 8–10 February, Auckland, New Zealand; Easton, Brian, The commercialisation of New Zealand, Auckland University Press, 2013; Luke, Belinda, ‘Re-examining the financial returns from New Zealand’s SOE sector: Re-examining privatisation’ (2013), http://eprints.qut.edu.au/72533.

INTRAPRENEURIAL STRATEGY As mentioned earlier, we define an intrapreneurial strategy as a vision-directed, organisation-wide reliance on entrepreneurial behaviour that purposefully and continuously rejuvenates the organisation and shapes the scope of its operations through the recognition and exploitation of entrepreneurial opportunity. Intrapreneurial strategy should be thought of in continuous, rather than dichotomous, terms. Stated more directly, intrapreneurial strategies vary in their degree of entrepreneurial intensity. Figure 8.2 presents the ABC Model of Intrapreneurial Strategy.33 Across the top we have three levels of analysis: (A) Antecedents, (B) Behaviours and (C) Consequences of Intrapreneurial Strategy. Down the left side we have the three operational levels: (D) the Organisation itself, (E) Top-Level Managers and (F) the Employees and Staff. Within (A) Antecedents, we have (1) Individual Intrapreneurial Cognitions of the employees and staff comprising their beliefs, attitudes and values;

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Level of Analysis

FIGURE 8.2

THE ABC MODEL OF INTRAPRENEURIAL STRATEGY

(A) Antecedents before starting an Intrapreneurial Strategy

(B) Behaviours needed in an Intrapreneurial Strategy

(3) Pro-Intrepreneurship Organisational Structure

• Competitive Intensity • Technological Change • Product-Market Fragmentation • Product-Market Emergence

(E) Top-Level Managers

(D) The Organisation

(2) External Environmental Conditions

• Culture • Resources/Capabilities • Reward Systems

(6) Competitive Capability

(7) Strategic Repositioning

(5) Intrepreneurial Strategic Vision

(1) Individual Intrepreneurial Cognitions (F) Employees and Staff

(C) Consequences of Using an Intrapreneurial Strategy

Entrepreneurial . . . • Beliefs • Attitudes • Values

(4) Intrepreneurial Processes and Behaviour • Opportunity Recognition • Opportunity Exploitation

Source: Adapted from Ireland, R. D., Covin, J. G. & Kuratko, D. F. (2009). Conceptualizing corporate entrepreneurship strategy. Entrepreneurship Theory and Practice 33(1), 24

and (2) External Environmental Conditions surrounding the firm comprised of competition, change and market factors. Within (B) Behaviours, we have (3) Pro-Intrapreneurial Organisational Structure comprising culture, resources and rewards systems; and (4) Intrapreneurial Processes and Behaviour, comprising opportunity recognition and exploitation. All of these are focused on the most important aspect, (5) Intrapreneurial Strategic Vision (pink) at the core of the self-reinforcing model, made up of the Antecedents and Behaviours at the three different Operational Levels. From (4) Intrapreneurial Processes and Behaviours come (C) Consequences of Intrapreneurial Strategy, namely (5) Competitive Capability (green) and (6) Strategic Respositioning (grey). Both of these feed back into the model. An intrapreneurial strategy cannot be consciously chosen and quickly enacted the way some strategies (such as acquisition) can – it requires more than just a decision, act or event. It requires the creation of congruence between the entrepreneurial vision of the organisation’s leaders and the

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entrepreneurial actions of those throughout the organisation, as facilitated through the existence of a pro-entrepreneurship organisational architecture. Intrapreneurial strategy is about creating self-renewing organisations through the unleashing and focusing of the entrepreneurial potential that exists throughout those organisations. Firms that engage in intrapreneurial strategies must encourage entrepreneurial behaviour on a continuous basis. Obviously, it is a matter of degree how extensive the entrepreneurial behaviour has to be before claiming there is an intrapreneurial strategy in place. At one end is inaction, or the absence of innovation; at the other end is chaos, or overwhelming innovation. Baden-Fuller and Volberda warn against the overwhelming; they say that too much change ‘will lead to chaos, loss of cultural glue, fatigue, and organisational breakdown. While in the short term, organisations that are chaotic can survive, in the longer term they are likely to collapse’.34 Therefore, for intrapreneurship to operate as a strategy, it is best to ‘run deep’ rather than fast within organisations. Are you ready to test yourself on this topic? Turn to the Experiencing Intrapreneurship exercise ‘Developing intrapreneurship’ at the end of this chapter.

THE FIVE STEPS TO AN INTREPRENEURIAL STRATEGY With that framework in mind, let’s look at the five critical steps that comprise intrapreneurship strategy itself: (1) developing the vision, (2) encouraging innovation, (3) structuring for an entrepreneurial climate, (4) developing individual managers for intrapreneurship and (5) developing venture teams or innovation teams (I-teams). Each of these is now discussed in greater detail.

Developing the vision The first step in planning an intrapreneurial strategy for the enterprise is sharing the vision of innovation that the corporate leaders wish to achieve.35 The vision must be clearly articulated by the organisation’s leaders; however, the specific objectives are then developed by the managers and employees of the organisation. Because it is suggested that intrapreneurship results from the creative talents of people within the organisation, employees need to know about and understand this vision. Shared vision is a critical element for a strategy that seeks high achievement (see Figure 8.3).

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FIGURE 8.3 SHARED VISION

Relationships Mutual trust and a supportive basic attitude prevail

Belonging Having a purpose beyond the daily work

Mission and vision

Structure Local initiative and central synthesis

Commitment Active, committed participation of employees

Source: Johannessen, J. A. (1994). A systematic approach to the problem of rooting a vision in the basic components of an organisation. Entrepreneurship, Innovation and Change, March, 47.

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Encouraging innovation Innovation is the specific tool of the entrepreneur (see also Chapter 5). Therefore, large organisations must understand and develop innovation as the key element in their strategy. Numerous researchers have examined the importance of innovation within the business environment.36 Some authors have described innovation as chaotic and unplanned,37 while other researchers insist it is a systematic discipline.38 Yet both can be right, depending on the nature of the innovation. One way to understand this concept is to focus on two different types of innovation: radical and incremental.39 • Radical innovation is the launching of major breakthroughs that radically transform an industry, such as wireless Internet, iPods, videophones, Post-it¤ notes, disposable nappies, optical fibres, CT scanners, mobile phones, NutraSweet and even overnight mail delivery. They were all radical innovations at the early stages of their diffusion and adoption. They took experimentation and determined vision. They could be ‘managed’ only with difficulty, but they had to be recognised, nurtured and guided. • Incremental innovation refers to the systematic transformation of an existing product or service into newer or larger markets. These are all products at advanced stages of their product life cycles. Examples include the newest version of Microsoft Windows, the Nespresso coffee system, microwave popcorn, packaging beads (to replace Styrofoam), frozen yoghurt and so forth. Sometimes an incremental innovation will actually take over after a radical innovation introduces a breakthrough (see Figure 8.4). Think of how many incremental versions of Microsoft Windows there have been! The structure, marketing, financing and formal systems of a company can help implement incremental innovation. As Sir Richard Branson said, ‘Business opportunities are like buses; there’s always another one coming’; Virgin Airlines is like that. It is the airline famous for service innovation. Nothing radical, just incrementally better than the others – constantly. FIGURE 8.4 RADICAL VERSUS INCREMENTAL INNOVATION

Dollars

New products

Product improvements and extensions

Creates new markets

Better ways of doing business

Highly experimental

More systematic and predictable

Radical innovation

Incremental innovation

Prototype

Market test

Rapid growth

Industry shake-out

Industry maturity

Industry decline

Source: Harry S. Dent, Jr (2006). Reinventing corporate innovation. Small Business Reports, June, 33.

• Platform innovation is somewhere in between, or it combines both. Take Gore-Tex, the waterproof, breathable fabric that repels water while allowing sweat to pass out. Originally it was a polymer to insulate electrical cables. A platform innovation exploits existing

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technologies to open up an entirely different market/platform for it.40 Another example is data recording where magnetic tape and floppy disks were both based on core technology. Amazingly, the history of technology development is littered with good ideas which were not taken up by their creators, like the computer mouse or GUI (graphical user interface). Large corporations failed to commercialise these ideas because they fell ‘outside of our core competencies’. Other organisations took the ideas and created wealth with them. Recent research shows that large companies fail at developing radical innovations in their core markets because they fear that the new innovations will compete with existing products and services.41 Fortunately for IBM, in the 1940s they didn’t listen to the advice of their president, Thomas J. Watson, who reputedly said: ‘I think there is a world market for about five computers’.42 Both types of innovation require vision and support. This support takes different steps for effective development (see Table 8.6). In addition, they both need a champion – the person with a vision and the ability to share it.43 Both types of innovation require an effort by the top management of the company to develop and educate employees concerning innovation and intrapreneurship, a concept known as top management support.44 Key persons in the organisation are the managers at all levels, but also the mutual interaction processes between colleagues on the individual level. There will not be any intrapreneurship without action, effort and achievement that comes from the individuals themselves.45 TABLE 8.6

DEVELOPING AND SUPPORTING RADICAL AND INCREMENTAL INNOVATION

RADICAL

INCREMENTAL

Stimulate through challenges and puzzles

Set systematic goals and deadlines

Remove budgetary and deadline constraints when possible

Stimulate through competitive pressures

Encourage technical education and exposure to customers

Encourage technical education and exposure to customers

Allow technical sharing and brainstorming sessions

Hold weekly meetings that include key management and marketing staff

Give personal attention – develop relations of trust

Delegate more responsibility

Encourage praise from outside parties

Set clear financial rewards for meeting goals and deadlines

Have flexible funds for opportunities that arise Reward with freedom and capital for new projects and interests Source: Adapted from Harry S. Dent Jr (2006). Reinventing corporate innovation. Small Business Reports, June, 36.

Structuring the right workplace for intrapreneurship Managers of intrapreneurial employees must invest in a workplace conducive to innovation and entrepreneurship. An employee’s willingness and ability to act entrepreneurially is based on an assessment that is internally calculated with self-interest and preservation in mind. Each employee is asking him or herself: are the perceived costs and benefits of becoming an intrapreneur worth taking personal risks, challenging current practices, devoting time to unproven approaches, persevering in

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the face of resistance, and enduring the ambiguity and stress that entrepreneurial behaviour can create? The kind of sustained innovation the manager might seek is more likely when an individual’s entrepreneurial potential is sought after and nurtured, and where organisational knowledge is widely shared. Top managers must design elements that promote an ‘innovation friendly’ workplace and develop an environment that will help innovative-minded people reach their full potential.46 When inventorying the organisation’s readiness for innovation, managers need to identify those parts of the firm’s structure, control systems, human resource management systems and culture that inhibit, and those parts that facilitate, intrapreneurial behaviour. One environmental assessment tool that can be used is the Corporate Entrepreneurship Assessment Instrument (CEAI), developed by Kuratko and Hornsby to measure five key entrepreneurial climate factors.47 These five factors are critical to the internal environment of an organisation seeking to have its managers pursue innovative activity.

Developing your managers for intrapreneurship Bringing your middle and senior managers up to speed is crucial. Executive leaders must create an understanding of the innovation process for their employees. This should not be left to chance. Experience demonstrates that executives need to develop a program with the purpose of helping all parties who will be affected to understand the value of the entrepreneurial behaviour that the firm is requesting of them, as the foundation for a successful innovation. Here are the ways that experience and research have shown are essential. Management support This is the extent to which the management structure itself encourages employees to believe that innovation is, in fact, part of the role set for all organisation members. Some of the specific conditions that reflect management support include quick adoption of employee ideas, recognition of people who bring ideas forward, support for small experimental projects and seed money to get projects off the ground. Autonomy/work discretion Workers have discretion to the extent that they are able to make decisions about performing their own work in the way they believe is most effective. Organisations should allow employees to make decisions about their work process and should avoid criticising them for making mistakes when innovating. Rewards/reinforcement Rewards and reinforcement enhance the motivation of individuals to engage in innovative behaviour. Organisations must be characterised by providing rewards contingent on performance, providing challenges, increasing responsibilities and making the ideas of innovative people known to others in the organisational hierarchy. Time availability The fostering of new and innovative ideas requires that individuals have time to incubate ideas. Organisations must moderate the workload of people, avoid putting time constraints on all aspects of a person’s job and allow people to work with others on long-term problem solving. Organisational boundaries These boundaries, real and imagined, prevent people from looking at problems outside their own jobs. People must be encouraged to look at the organisation from a broad perspective. Organisations

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TABLE 8.7

THE INTRAPRENEUR’S COMMANDMENTS

1

Come to work each day willing to give up your job for the innovation.

2

Circumvent any bureaucratic orders aimed at stopping your innovation.

3

Ignore your job description – do any job needed to make your innovation work.

4

Build a spirited innovation team that has the ‘fire’ to make it happen.

5

Keep your innovation ‘underground’ until it is prepared for demonstration to the corporate management.

6

Find a key upper-level manager who believes in you and your ideas and who will serve as a sponsor to your innovation.

7

Permission is rarely granted in organisations; thus, always seek forgiveness for the ‘ignorance’ of the rules that you will display.

8

Always be realistic about the ways to achieve the innovation goals.

9

Share the glory of the accomplishments with everyone on the team.

10

Convey the innovation’s vision through a strong venture plan.

should avoid having standard operating procedures for all major parts of jobs, and should reduce dependence on narrow job descriptions and rigid performance standards.48 In light of these workplace elements, it is clear that change in the organisation structure is inevitable if innovative activity is going to exist and prosper. The change process consists of a series of emerging constructions of people, corporate goals and existing needs. In short, the organisation can encourage innovation by relinquishing controls and changing the traditional bureaucratic structure. (See Table 8.7 for the intrapreneur’s commandments.)

Developing venture or innovation teams Used interchangeably, venture teams or innovation teams (I-teams) have great potential as new century productivity accelerators. Companies that have committed to an innovation team approach often label the change they have undergone a ‘transformation’ or ‘revolution’. This modern breed of work team is a new strategy for many companies. It is referred to as self-directing, self-managing or high performing, although in reality an I-team fits all of those descriptions.49 In examining the entrepreneurial development for corporations, Robert Reich found that entrepreneurial thinking is not the sole province of the company’s founder or its top managers. Rather, it is diffused throughout the company, where experimentation and development occur all the time as the company searches for new ways to build on the knowledge already accumulated by its workers. Reich defines collective entrepreneurship as follows: In collective entrepreneurship, individual skills are integrated into a group; this collective capacity to innovate becomes something greater than the sum of its parts. Over time, as group members work through various problems and approaches, they learn about each other’s abilities. They learn how they can help one another perform better, what each can contribute to a particular project, how they can best take advantage of one another’s experience. Each participant is constantly on the lookout for small adjustments that will speed and smooth the evolution of the whole. The net result of many such small-scale adaptations, effected throughout the organisation, is to propel the enterprise forward.50

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In keeping with Reich’s focus on collective entrepreneurship, venture teams offer companies the opportunity to use the talents of individuals but with a sense of teamwork. An I-team is composed of two or more people who formally create and share the ownership of a new organisation.51 The unit is semi-autonomous in the sense it has a budget plus a leader who has the freedom to make decisions within broad guidelines. Sometimes the leader is called an innovation champion or an intrapreneur. The unit is often separated from other parts of the company – in particular, from parts involved with daily activities. This prevents the unit from engaging in procedures that can stifle innovative activities. If the venture proves successful, however, it eventually is treated the same as other outputs the organisation produces. It is then integrated into the larger organisation.52 In many ways an I-team is a micro business operating within a large business. Its strength is its focus on design (that is, structure and process) issues for innovative activities. Specific entrepreneurial strategies vary from firm to firm. However, they all follow similar patterns of seeking a proactive change of the status quo and a new, flexible approach to operations management.

SOCIAL INTRAPRENEURSHIP BY CREATING SHARED VALUE Where are the corporate equivalents of social entrepreneurs, who are often the greatest agents for social change? Is social or environmental innovation even compatible with large organisations? The answer, of course, is yes. There is nothing that prevents a social entrepreneur (see Chapter 5 on social venturing and Chapter 4 on social entrepreneurship) from leading a large organisation. We call that ‘corporate social entrepreneurship’.53 Social intrapreneurs demonstrate that business and social values can be aligned. This is nowhere so true as in the field of environmental sustainability.54 A social intrapreneur is a person working in a large business or social organisation who is developing and promoting practical solutions to social or environmental challenges where progress is currently stalled by market failures.55 A social intrapreneur is an employee of a large organisation who uses entrepreneurial principles to address social and environmental challenges. In contrast to social entrepreneurs in small organisations, social intrapreneurs in large organisations can leverage resources and capabilities to deliver social value on a large scale. She or he does so by delivering solutions or products that add value to the company’s bottom line as well as to society and the planet. Far-sighted companies are increasingly identifying individuals who look beyond conventional business practices and who can foster economic, environmental and social value.56 Here are the basic tenets of social intrapreneurship. Social intrapreneurs: • see businesses as part of the Earth ecosystem and needing to add value to society and the environment as well as to the bottom line • understand business priorities as well as environmental imperatives as they respond to market failures and increased societal expectations of business • are often more interested in social change than in personal wealth creation as they create new business models and force their organisations to look outside traditional models • share many personality traits with social entrepreneurs, who may actually spurn the business environment • understand the need to tie into processes and business case elements.57 If you want to test yourself on this topic, try the Experiencing Intrapreneurship exercise ‘Spot the social intrapreneur’ at the end of the chapter.

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In fact, there is a veritable rush to develop social intrapreneurs for innovation and growth led by none other than Harvard’s famous management guru, Michael E. Porter together with Mark R. Kramer, co-founder of FSG Research. In a world where heavyweight global companies influence society and the environment as much as state actors, they are challenged to take on a new identity towards shared value – not just the cosmetics of corporate social responsibility. Porter and Kramer’s concept elevates social goals to a strategic level.58 What is shared value? The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. The central premise is that the competitiveness of a company and the health of the communities around it are mutually dependent. Social intrapreneurial companies can create shared value opportunities by reconceiving products and markets, redefining productivity in the value chain and capturing natural resources, and enabling local cluster development. Food companies such as Nestle´ and Danone are repositioning themselves as nutrition and health companies. Carmakers such as Nissan and Toyota are redefining their purpose as providing low-emissions mobility. And technology and telecommunications firms such as IBM and Intel have made improving education and healthcare and making cities more livable their central missions. Who is creating shared value? Here are some good examples: • Bendigo Bank (Australia) has partnered with local cities and towns to create a community bank where communities run their own branches as franchisees, leverage the bank’s infrastructure and expertise, and reinvest a portion of their revenue into communities to drive long-term growth.59 • PricewaterhouseCoopers Indigenous Consulting firm (Australia) was founded by four Aboriginal entrepreneurs with PricewaterhouseCoopers to combine Indigenous expertise with PwC’s professional services capability.60 • Nestle´ New Zealand creates connections with local schools, offering helping hands to nonprofit organisations, and discovering new opportunities to give back to the local communities in meaningful ways.61 • Mars (Ivory Coast) catalysed a coalition of farms and communities to revitalise the cocoa sector in the world’s largest cocoa producing country.62 • Adidas partnered with Grameen Bank to manufacture a low-cost shoe for the poor in Bangladesh.63 • Dhaka Bank (Bangladesh) came up with solutions to attract new customers in rural communities that were actually teeming with business activity.64 • Western Union consolidated the money transfer process for NGOs, including a Syrian refugee camp in Turkey.65 • Kirin (Japan) worked to reduce drunk driving accidents developed the world’s first nonalcoholic beverage that tastes like beer, KIRIN FREE, in 2009.66 • Dow Chemical removed 600m tonnes of trans fats and saturated fats from the US diet using sunflower and canola seeds.67 In fact, the only limit to shared value is the imagination. Table 8.8 presents some interesting market gaps that can be plugged by social intrapreneurs using the shared value approach.

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TABLE 8.8 GAPS BETWEEN THE HAVES AND HAVE NOTS

COMMERCIAL POSSIBILITIES FOR SOCIAL INTRAPRENEURS REALITIES BROUGHT ABOUT THROUGH GLOBALISATION

COMMERCIAL POSSIBILITIES FOR SOCIAL INTRAPRENEURS

Demographic

The world is heading to a population of 9 billion by 2050, with 95% of growth expected in developing countries.

To meet the needs of billions of people affected by market failures in both developing and developed countries.

Financial

40% of the world’s wealth is owned by 1% of the population, while the poorest 50% can claim just 1% of the wealth.

Help the have-nots become bankable, insurable and entrepreneurial.

Nutritional

The world now produces enough food for everyone, but over 850 million people still face chronic hunger every day.

Address the needs of those with too little food – and too much.

Resources

60% of ecosystem services, such as fresh water and climate regulation, are being degraded or used unsustainably.

Enable development that uses the earth’s resources in a sustainable way.

Environmental

The loss of biodiversity, droughts and the destruction of coral reefs are just some of the challenges facing the globe.

Create markets that protect and enhance the environment.

Health

Some 39.5 million people live with HIV/AIDS in the world, now the fourth-largest killer disease.

Create markets that encourage healthy lifestyles and enable equal access to healthcare.

Gender

Two-thirds of the world’s 1 billion illiterate people are women.

Enable and empower women to participate equally and fairly in society and the economy.

Educational

About 100 million children within emerging economies are not enrolled in primary education.

Provide the mechanisms to transfer and share knowledge and learning that empowers all levels of societies.

Digital

Internet users worldwide topped 1.1 billion in 2007, but only 4% of Africans and 11% of Asians have Internet access.

Develop inclusive technology that enables all levels of society to tackle each of these divides more effectively.

Security

Between 1994 and 2003, the majority of the 13 million deaths caused by intra-state conflict took place in subSaharan Africa and western and southern Asia – regions that are home to 75% of the world’s 37 million refugees and displaced people.

Work to promote security and reduce conflict based on inequity and exclusion.

Source: SustainAbility, The Skoll Foundation, Allianz & IDEO. (2008). The social intrapreneur: A field guide for corporate changemakers, SustainAbility, The Skoll Foundation, Allianz & IDEO, ª 2008.

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SUMMARY Around the world, more and more entrepreneurs are starting up businesses for their employers. We call this ‘entrepreneurial employee activity’. Intrapreneurship is the process of profitably creating innovation within (sometimes very large) organisational settings. An intrapreneurial organisation is willing to initiate actions, pursue opportunities and emphasise new, innovative products or services. Most companies are realising the need for intrapreneurship. Intrapreneurship can lead to innovation, new product development, greater wealth creation and economic development for companies that want to compete effectively in international markets. The term ‘intrapreneurship’ means both new-venture creation within existing organisations (be they profit-making, non-profit, public or non-governmental) and their transformation through strategic renewal. It shows how to harness the entrepreneurial spirit inside a large organisation, be it government, a social enterprise, even the church. When developing in-house entrepreneurship, companies must develop four characteristics: (1) explicit goals, (2) a system of feedback and positive reinforcement, (3) an emphasis on individual responsibility and (4) rewards based on results. Organisations create intrapreneuring in a variety of ways. The first step is to understand the obstacles to intrapreneurship. These are usually based on the adverse impact of traditional management techniques. The next step is to adopt innovative principles that include atmosphere and vision, multiple approaches, interactive learning and skunkworks/gumboot factory. Intrapreneurship is not just for companies; it is also for government bureaucracies and other large institutions. While public and private sector entrepreneurs have a lot in common, there are some significant differences. Public sector organisations have fewer entrepreneurs, are hierarchically structured and are rigid environments. They often have unclear objectives, fewer resources available for change, significant risk aversion and often political intrusion. Intrapreneurial strategies entail the development of a vision as well as the development of innovation. Two types of innovation exist: radical and incremental. To facilitate the development of innovation, companies need to focus on the key factors of top management support, time, resources and rewards. Thus, commitment to and support of intrapreneurial activity are critical. Innovation teams (I-teams) are the semi-autonomous units that have the collective capacity to develop new ideas. Sometimes referred to as self-managing or high-performance teams, venture teams are emerging as the new breed of work teams formed to strengthen innovative developments. Structuring the right workplace for intrapreneurship is the essential task of top leadership. Employees may be more or less willing to act entrepreneurially based on self-interest and self-preservation. Top managers must design elements that promote an ‘innovation friendly’ workplace and develop an environment that will help innovative-minded people reach their full potential. At the end of the chapter, we discussed the new breed of social intrapreneur. These are people working in large organisations who are focused both on creating shared value and on benefit to the planet. They have many of the same personality characteristics of other entrepreneurs.

KEY TERMS AND CONCEPTS champion collective entrepreneurship corporate entrepreneurship Corporate Entrepreneurship Assessment Instrument (CEAI) corporate venturing entrepreneurial economy entrepreneurial employee activity

Entrepreneurship

Global Entrepreneurship Monitor (GEM) governpreneurship gumboot factory or skunkworks incremental innovation innovation team (I-team) interactive learning intracapital

Review key terms with interactive flashcards

intrapreneurs intrapreneurship intraprise new venture creation

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private sector entrepreneurs public sector entrepreneurship radical innovation risk aversion

shared value skunkworks social intrapreneur social intrapreneurship

strategic entrepreneurship strategic renewal top management support venture team

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

What is intrapreneurship? What is the difference between a business intrapreneur and a social intrapreneur? How do global levels of entrepreneurial employee activity (EEA) compare to total entrepreneurial activity (TEA)? Do you believe that intrapreneurs are a different breed of entrepreneur? What are two reasons that such a strong desire to develop intrapreneurs has arisen in recent years? How does an entrepreneur differ from an intrapreneur? Compare and contrast the two. What are five ways that an organisation can re-engineer its thinking? What are some of the obstacles that must be overcome to establish an intrapreneurial environment? What are some of the innovative principles identified by James Brian Quinn (in the section on ‘Obstacles to intrapreneurship and innovation’) that companies need to establish? Why do we say that intrapreneurship is not for businesses only? Companies today are working to re-engineer their thinking and encourage an intrapreneurial strategy. What types of steps would you recommend? Offer at least three and explain each. Identify the four key elements on which managers should concentrate to develop an intrapreneurial strategy. Explain the differences between radical and incremental innovation. Identify the five specific entrepreneurial factors that organisations need to address in structuring their environment. Why are innovation teams emerging as part of a new strategy for many companies? What is a social intrapreneur? Can you make a list of characteristics that differentiate this type of person from a regular business entrepreneur? Why do companies need sustainable intrapreneurs? Why do governments? What is Porter’s concept of ‘creating shared value’? Give examples not in the book.

EXPERIENCING ENTREPRENEURSHIP The ideal business for an intrapreneur Work with a team within an organisation to set the stage for developing an intrapreneurial work environment. In discussion consider the following: • Have members of the team visualise an innovative organisation. • Have them describe the characteristics of an innovation organisation or team. • Ask them to expound on the themes and lay out the reasons why they consider themselves to be an innovative organisation.68

EXPERIENCING ENTREPRENEURSHIP Developing intrapreneurship Many ways of developing intrapreneurship exist. Some of these are presented in the following list. Write yes next to those that would help develop intrapreneurship and no next to those

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that would not help develop intrapreneurship. You will find the answers just before the endnotes. 1 _____ Create an innovative climate. 2 _____ Set implicit goals. 3 _____ Provide feedback on performance. 4 _____ Provide positive reinforcement. 5 _____ Encourage structured activity. 6 _____ Develop a well-defined hierarchical structure, and stick to it. 7 _____ Tolerate failure. 8 _____ Encourage a bias for action. 9 _____ Make extensive use of formal meetings. 10 _____ Allow bootlegging of ideas. 11 _____ Reward successful personnel. 12 _____ Sack those who make mistakes as a way of creating a good example for others. 13 _____ Make extensive use of informal meetings. 14 _____ Encourage communication throughout the organisation. 15 _____ Discourage joint projects and ventures among different departments. 16 _____ Encourage brainstorming. 17 _____ Encourage moderate risk taking. 18 _____ Encourage networking with others in the enterprise. 19 _____ Encourage personnel not to fear failing. 20 _____ Encourage personnel to be willing to succeed even if it means doing unethical things.

EXPERIENCING ENTREPRENEURSHIP Are you an intrapreneur? Many people have intrapreneurial desires and would enjoy working in a job that allows them to fulfil these ambitions. Are you an intrapreneur? To find out, answer the following questions. An interpretation of the responses is provided at the end. 1 Are you a high risk taker? 2 Do you enjoy taking the ideas of others and working to improve them? 3 Do you prefer to work alone rather than with others? 4 Are you effective at networking with others? 5 Do you like to work around rules and regulations by figuring out how to get things done despite all the red tape? 6 Would you be willing to risk losing your job to develop or improve a product that could make a great deal of money for the company? 7 Are you loyal and true to those who work with you? 8 In terms of what motivates you, is money near the top of the list? 9 Do you believe luck is a critical factor in the success of most individuals? 10 Are your ethics and morals higher than those of the average person? 11 Do you like to roll up your sleeves, dive in, and get involved in accomplishing things? 12 Do you like to have your boss set goals for you rather than do it yourself? 13 Do you believe that to get ahead you often have to do things that are illegal or unethical? 14 Are you extremely self-confident? 15 Do you like to gather information and examine the facts before you jump into something, as opposed to getting in quickly and going to work on a project? 16 Do status symbols such as a big office, a company car, and a key to the executive washroom strongly motivate you? 17 Are you good at persuading people to do things?

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18 Do you often dislike the organisational system but overcome this dislike by working out ways of manipulating the rules and regulations to your own advantage? 19 Do you enjoy following orders from above? 20 Are you good at generating fresh ideas? Give yourself 1 point for each of the following answers: 1. No; 2. Yes; 3. No; 4. Yes; 5. Yes; 6. Yes; 7. Yes; 8. Yes; 9. No; 10. Yes; 11. Yes; 12. No; 13: No; 14. Yes; 15. No; 16. No; 17. Yes; 18. Yes; 19. No; 20. Yes. A score of 15 or more indicates that you have values and beliefs that are similar to those of successful intrapreneurs.69

EXPERIENCING ENTREPRENEURSHIP Spot the social intrapreneur What are the key differences between intrapreneurs and entrepreneurs? There are a fair number, but one of the most important is that – unlike individual entrepreneurs – intrapreneurs potentially leverage the resources of their large host organisations. This is a checklist for spotting social intrapreneurs. This list draws upon a multitude of sources for social entrepreneurial characteristics. Put a tick in the box that applies. SOCIAL ENTREPRENEUR

Experience this activity online

SOCIAL INTRAPRENEUR

1 Shrug off constraints of ideology or discipline 2 Identify and apply practical solutions to social or environmental problems 3 Innovate by finding a new product, service or approach to a social challenge 4 Focus – first and foremost – on societal value creation 5 Successfully navigate corporate culture, strategy and process 6 Communicate social entrepreneurship in compelling business terms 7 Build and inspire teams across a multiplicity of corporate divisions 8 Jump in before they are fully resourced 9 Have a dogged determination that pushes them to take risks 10 Combine their passion for change with measurement and monitoring of impact 11 Have a healthy impatience – they don’t like bureaucracy 12 Run their organisations Source: SustainAbility, The Skoll Foundation, Allianz & IDEO. (2008).The social intrapreneur: A field guide for corporate changemakers, https://www.allianz.com/static-resources/en/about_allianz/sustainability/media/documents/v_1250777754000/social_intrapreneur2008.pdf, 27 SustainAbility, The Skoll Foundation, Allianz & IDEO, ª 2008.

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4

Defined

Integrated

Innovative

Leader articulates the message Leaders of the organisation set the tone through specific words and actions, through planned associations with stakeholders and groups, and through the stories they tell. Arrange fora where corporate leaders can share how they integrated CE into their business.

r

r

r

r

r

2

Use cross-functional working groups Teams from across the organisation come together with a shared purpose or problem to resolve. They can be small or large and consist of same or different discipline employees of same or different seniority, depending on the nature of the problem.

r

r

r

r

r

3

Open forums and workshops Run open forums where employees can discuss initiatives, concerns, and ideas, and discuss relevant issues, especially for lower and middle level employees while maintaining an atmosphere where they can express themselves without fear.

r

r

r

r

r

4

Tailor the business case Create a business case for CE that is specific to your organisation’s business plan (same objectives, same long term targets). Creatively arrange ways to include Corporate Entrepreneurship in your business planning.

r

r

r

r

r

5

Use demonstration projects Profile previous CE-type activities that can provide models to motivate staff.

r

r

r

r

r

6

Piggyback Build upon existing projects to incorporate CE activities.

7

Education & skills development Build in skills training and connect completions to promotion on company internet or awayday sessions.

r

r

r

r

r

8

Individual opportunism Let people sit with or behind the action so they can see for themselves what CE is. Give volunteer opportunities, create a champions network.

r

r

r

r

r

9

Buddy system Create a buddy system where people can monitor and help each other so that the less experienced can form close contact with an experienced partner. This arrangement provides political benefits too.

r

r

r

r

r

10

Mobilise middle managers Middle managers can make or break CE because they stand between levels of managers. They can empower lower employees and champion their efforts at higher levels.

r

r

r

r

r

11

Create a visible CE team Publicise and profile the CE team through internal communications channels to increase trust and build credibility.

r

r

r

r

r

12

Reward and recognise People keep rewards beyond money. Put together a Rewards Club with incentives including recognition, training opportunities and promotion.

r

r

r

r

r

None – we have no approach. Reactive – our approach is not planned. Defined – we recognise the importance and Integrated – it is integrated into our regular planning and review processes Innovative – it is a highly innovative and strategically important h

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5

3

Reactive

1

1. 2. 3. 4. 5.

2

None

How would you describe your overall approach or the effectiveness of the deployment of each tactic?

1

Intrapreneurship ‘tactics’ scorecard

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13

Create a champions network Create a club that extends from top to bottom in the organisation of people who are interested in CE with representatives from all levels of the business.

r

r

r

r

r

Adapted from Dougherty Centre for Corporate Responsibility. Engaging employees in corporate responsibility. Published by Cranfield University School of Management, ª 2011; and from the Singapore Innovation Scorecard, http://www.som.cranfield.ac.uk/som/dinamic-content/media/ Engaging%20Employees%20in%20Corporate%20Responsibility.pdf

CASE STUDIES CASE 8.1 Which commandments apply? Gifford Pinchot is famous for his ‘Intrapreneur’s Ten Commandments’, first put forward in 1985. But over the years he has modified some of them because of criticisms that you might get fired if you follow them all! Here is a list that comprises all the commandments in his three lists from 1985 to 2011. Some of them have become ‘gentler’ over the years. • Ask for advice before asking for resources. • Be true to your goals, but be realistic about how to achieve them. • Build your team; intrapreneuring is not a solo activity. • Circumvent any orders aimed at stopping your dream. • Come to work each day willing to be fired. • Do any job needed to make your project work, regardless of your role’s description. • Don’t ask to be fired; even as you bend the rules and act without permission. • Use all the political skill you and your sponsors can muster to move the project forward without making waves. • Express gratitude. • Find people to help you. • Follow your intuition about the people you choose, and work only with the best. • Honour and educate your sponsors. • Keep the best interests of the company and its customers in mind, especially when you have to bend the rules or circumvent the bureaucracy. • Never bet on a race unless you are running in it. • Remember it is easier to ask for forgiveness than for permission. • Share credit widely. • Underpromise and overdeliver – publicity triggers the corporate immune system. • Work underground as long as you can – publicity triggers the corporate immune mechanism. Sources: Pinchot, G. (1985). Intrapreneuring: Why you don’t have to leave the company to become an entrepreneur. New York: Harper and Row; Pinchot & Co. http://company.pinchot.com/MainPages/BooksArticles/InnovationIntraprenuring/TenCommandments.html

QUESTIONS

1 2 3 4 5 6 7 8

Of the eighteen ‘commandments’ listed above, which are the most aggressive? Which are gentler? Rank-order them in actual importance to you with numbers 1 to 18. Which of these commandments can get you fired? Why are they not always the best approach? What do managers in your organisation normally do to free-wheeling risk-takers? Are the interests of the intrapreneur sometimes not aligned with those of the shareholder? Do you really have to be as brazen or daring to accomplish your goals? Do you agree with the statement that ‘those who were most successful within corporations did not what they were told, but what needed to be done’? Which of the commandments apply as well to other workers as they do to intrapreneurs?

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9 Which depend on individual style more than anything else? 10 Which are affected by national culture? 11 Which are affected by gender?

CASE 8.2 Southwest Airlines: creating an entrepreneurial culture

We can learn a lot from the Americans on corporate entrepreneurship, or intrapreneurship, since they invented the word. This classic case by Don Kuratko has appeared in all of our versions because it is the best way to show best practice. In our region, Air Asia comes close to this model. When Southwest Airlines first taxied onto the runway of Dallas, Texas (USA) Love Field in 1971, industry gurus predicted it would be a short trip to bankruptcy for the Texas-based airline. But the first short-haul, low-fare, highfrequency, point-to-point carrier took a unique idea and made it fly. Today, Southwest Airlines is the most profitable commercial airline in the world based on domestic passengers carried. Southwest has 37 000 employees and operates more than 3300 flights a day with scheduled service to 97 destinations in 42 states. It took more than a wing and a prayer for Southwest to soar to such lofty altitudes – it required a maverick spirit. From the beginning, Southwest has flown against convention. Southwest’s fleet of 737s – considered by many the safest in the industry – still makes only short flights and is the largest operator of the 737 worldwide with over 550 of these aircraft in service, each operating an average of six flights per day. The airline does not give seat assignments, and the only food it serves passengers is a ‘snack pack’. But what Southwest may lack in amenities, it seems to more than make up for in what could be called positively outrageous service. ‘Fun’ is the company’s mandate. Leading the way for years was the founder and former CEO, Herb Kelleher. ‘Herb Kelleher was definitely the zaniest CEO in the world,’ Libby Sartain, vice president of Southwest Airlines’ People Department, admits. ‘Where else would you find a CEO who dressed up as Elvis Presley, who was on a first-name basis with over 30 000 employees, and who still has a heart as big as the state of Texas? His style fostered an atmosphere where people feel comfortable being themselves – where they can have a good time when they work.’ Legendary for his love of laughter, Kelleher called his unique leadership style management by fooling around. ‘An important part of leadership, I think, is enjoying what you’re doing and letting it show to the people that you work with,’ Kelleher reveals. ‘And I would much rather have a company that is bound by love, rather than bound by fear.’ Kelleher’s philosophy has been enthusiastically embraced by the current executive staff and by a workforce that is 85 per cent unionised. ‘Southwest’s culture is designed to promote high spirit and avoid complacency. We have little hierarchy here. Our employees are encouraged to be creative and innovative, to break rules when they need to in order to provide good service to our customers,’ Sartain explains. ‘If you create the type of environment that a person really feels valued and they feel they make a difference, then they’re going to be motivated. That’s the type of environment we create here for our employees,’ adds Rita Bailey, Southwest’s director of training. Beginning with its new-employee orientation, the airline nurtures intrapreneurship by grooming a workforce of leaders. ‘You can do whatever it takes to keep this airline on top’, an orientation instructor tells his class of newly hired staffers. At Southwest Airlines’ University for People, future managers and supervisors attend a course titled ‘Leading with Integrity’. Through a series of role-playing exercises, employees learn that trust, cooperation, mutual respect and good communication are the components of success. ‘An organization that has an esprit, that does things cooperatively and voluntarily rather than through coercion, is the most competitive organization you can have,’ Kelleher once asserted. These guiding principles have earned Southwest Airlines the distinction of continuously being named one of the ten best companies to work for in America. Employees are valued and recognised for their achievements in many ways. Perhaps the most prestigious is Southwest’s ‘Heroes of the Heart’ award. Each year, one outstanding department has its name tattooed on a Southwest jet. Southwest also was the first airline to offer stock options to its employees. Today, employees own approximately 10 per cent of the company. In the lobby of Southwest Airlines’ corporate headquarters is a prominent tribute to the men and women of Southwest. It reads: ‘The people of Southwest Airlines are the creators of what we have become – and what we will be. Our people transformed an idea into a legend. That legend will continue to grow only so long as it is nourished by our

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people’s indomitable spirit, boundless energy, immense goodwill, and burning desire to excel. Our thanks and our love to the people of Southwest Airlines for creating a marvelous family and wondrous airline.’ QUESTIONS

1 2 3

Describe some of the factors needed to re-engineer corporate thinking that Southwest Airlines already exhibits. What specific elements of a corporate entrepreneurial strategy are apparent within Southwest Airlines? How was Herb Kelleher instrumental in structuring a climate conducive to entrepreneurial activity?

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. corporate entrepreneurship public sector entrepreneurship intrapreneurship radical innovation new venture creation 1

2 3

4

Locate the interesting encyclopedia entry for ‘Intrapreneurship’ by L. Hillstrom in Helms, M. M. (ed.), Encyclopedia of Management, 5th edn, Detroit: Gale, 2006, pp. 407–8. What does the author say are the most important factors in increasing intrapreneurship? Search (corporate entrepreneurship). What is the earliest article you can find in news and then in academic journals? Search (intrapreneurship) in books. Read the interesting entry ‘Intrapreneurship’, Encyclopedia of Small Business, 3rd edn, vol. 1. Detroit: Gale, 2007, pp. 632–3, especially what encourages intrapreneurship. Search (‘new venture creation’) and you’ll see Liang, Chyi-lyi ‘Kathleen’ and Paul Dunn, ‘Discovering heterogeneity of entrepreneurs: A comparison of food and non-food entrepreneurs’, Academy of Entrepreneurship, 20(2) (2014), pp. 19þ. What are the risks that food entrepreneurs face that other entrepreneurs do not? Search (public sector) and (entrepreneurs) in News. Read the interesting article by Tritch, Teresa, ‘America’s underappreciated entrepreneur: The federal government’, New York Times, 24 March 2014, A20(L). Would you consider your government to be a public sector entrepreneur? Do you believe the following article? ‘The public sector has much to gain from small business’, Independent [London], 20 April 2011, p. 2.

Answers: 1: Y; 2: N; 3: Y; 4: Y; 5: N; 6: N; 7: Y; 8: Y; 9: N; 10: Y; 11: Y; 12: N; 13: Y; 14: Y; 15: N; 16: Y; 17: N; 18: Y; 19: Y; 20: N.

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ENDNOTES 1 Adonis, J. (2011). Rise of the ‘intrapreneur’. The Age, 2 September. 2 ‘The Crazy Ones’ by Rob Siltanen and Lee Clow in ‘Think different  Apple’s Ad Campaign’. Copyright ª 1997 by Apple, Inc. Used by permission. 3 Bosma, N., Wennekers, S., Guerrero, M., Amoro´s, J. E., Martiarena, A. & Singer, S. (2013). Global Entrepreneurship Monitor: Special Report on Entrepreneurial Employee Activity. Global Entrepreneurship Research Association, http://www. gemconsortium.org/docs/download/2890. 4 Zahra, S. A. (1991). Predictors and financial outcomes of corporate entrepreneurship: An exploratory study. Journal of Business Venturing, 6, 259–86. 5 Guth, W. D. & Ginsberg, A. (1990). Corporate entrepreneurship. Special issue, Strategic Management Journal, 11, 5–15. Some researchers used the term ‘rejuvenation’. See Stopford, J. M. & Baden-Fuller, C. W. F. (2004). Corporate rejuvenation. Journal of Management Studies, 27(4), 399–415. 6 Morris, M. H., Kuratko, D. F. & Covin, J. G. (2008). Corporate entrepreneurship and innovation. Mason, OH: SouthWestern/Cengage Learning. 7 Sharma, P. & and Chrisman, J. J. (1999). Toward a reconciliation of the definitional issues in the field of corporate entrepreneurship. Entrepreneurship Theory and Practice, Spring, 11–28. 8 Kawasaki, G. (2006). The art of intrapreneurship, how to change the world: A practical blog for impractical people, 4 January, http:// blog.guykawasaki.com/2006/01/ the_art_of_intr.html 9 For interesting studies on the comparison of managers and entrepreneurs, see Busenitz, L. & Barney, J. B. (1997). Differences between entrepreneurs and managers in large organisations: Biases and heuristics in strategic decision-making. Journal of Business Venturing, 12, 9–30; Chen, C. C., Greene, P. G. & Crick, A. Does entrepreneurial self-efficacy distinguish entrepreneurs from managers? Journal of Business Venturing, 13, 295–316; Stewart, W. H., Watson, W. E., Carland, J. C. & Carland, J. W. (1999). A proclivity for entrepreneurship: A comparison of entrepreneurs, small business owners and corporate managers. Journal of Business Venturing, 14, 189–214. 10 Pinchot, G. (1985). Intrapreneuring: Why you don’t have to leave the company

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to become an entrepreneur. New York: Harper and Row, 6. 11 De Jong, J. & Wennekers, S. (2008). Intrapreneurship; Conceptualizing entrepreneurial employee behaviour. Scales Research Reports(H200802, http:// www.entrepreneurship-sme.eu/pdf-ez/ H200802.pdf 12 Pinchot, G. (1985). Intrapreneuring: Why you don’t have to leave the company to become an entrepreneur. New York: Harper and Row. 13 Macrae, N. (1982). Intrapreneurial now. The Economist, 17 April, available at http://www.intrapreneur.com/MainPages/ History/Economist.html 14 See especially Morris, M. H. & Kuratko, D. F. (2002). Corporate entrepreneurship, Mason, OH: SouthWestern; Zahra, S. A., Kuratko, D. F. & Jennings, D. F. (1999). Entrepreneurship and the acquisition of dynamic organisational capabilities. Entrepreneurship Theory and Practice, Spring, 5–10. 15 Drucker, P. F. (1984). Our entrepreneurial economy. Harvard Business Review, January/February, 59–64. 16 Drucker, P. F. (1984). Our entrepreneurial economy. 60–1. 17 McGowan A. M. (2004). How industries change. Harvard Business Review, October, 86–94. 18 See, for example, Morse, C. W. (1985). The delusion of intrapreneurship. In B. Lloyd, Entrepreneurship. Creating and managing new ventures (p. 135), Oxford, UK: Pergamon Press; Duncan, W. J., et al. (1988). Intrapreneurship and the reinvention of the company. Business horizons, May/June, 16–21; Thornberry, N. (2001). Corporate entrepreneurship: Antidote or oxymoron? European Management Journal, 19(5), 526–33. 19 Burgelman, R. A. (1984). Designs for corporate entrepreneuring. California Management Review, 26, 154–66; Kanter, R. M. (1985). Supporting innovation and venture developments in established companies. Journal of Business Venturing, January, 47–60; Kuratko, D. F. & Montagno, R. V. (1989). The intrapreneurial spirit. Training and Development Journal, October, 83–6; Kuratko, D. F. & Hornsby, J. S. (1997). Developing entrepreneurial leadership in contemporary organisations. Journal of Management Systems, 8, 17–24; Kuratko, D. F., Ireland, R. D. & Hornsby, J. S.

(2001). Improving firm performance through entrepreneurial actions: Acordia’s corporate entrepreneurship strategy. Academy of Management Executive, 15(4), 60–71. 20 Brandt, S. C. (1986). Entrepreneuring in established companies, Homewood, IL: Dow-Jones-Irwin, 54. 21 Simons, R. (1999). How risky is your company? Harvard Business Review, May/June, 85–94. 22 Slevin, D. P. & Covin, J. G. (1990). Juggling entrepreneurial style and organisational structure: How to get your act together. Sloan Management Review, Winter, 43–53; and Dess, G. G., Lumpkin, G. T. & McGee, J. E. (1999). Linking corporate entrepreneurship to strategy, structure and process – Suggested research directions. Entrepreneurship Theory and Practice, 23(3), 85–102. 23 Adapted from Pinchot, G. Intrapreneuring, 198–9. 24 Hwengere, E. (2002). Factors that inhibit intrapreneurship. Financial Gazette, 30 May. 25 Sykes, H. B. & Block, Z. (1989). Corporate venturing obstacles: Sources and solutions. Journal of Business Venturing, Winter, 159–67; MacMillan, I. C., Block, Z. & Subba Narasimha, P. M. (1986). Corporate venturing: Alternatives, obstacles encountered and experience effects. Journal of Business Venturing, Spring, 177–91; Ginsberg, A. & Hay, M. (1994). Confronting the challenges of corporate entrepreneurship: Guidelines for venture managers. European Management Journal, 12, 382–9; Lumpkin, G. T. & Dess, G. G. (2001). Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle. Journal of Business Venturing, 16(5), 429–52; Eesley, D. T. & Longenecker, C. O. (2006). Gateways to intrapreneurship. Industrial Management, 48(1), January, 18–23; and Biniari, M. G. The emotional embeddedness of corporate entrepreneurship: The case of envy. Entrepreneurship Theory and Practice, 36(1) (2012), 141–70. 26 Gumboot factory is the Australian/ New Zealand translation of the American ‘skunkworks’. A skunkworks is a group of people who, in order to achieve unusual results, work on a project in a way that is outside the usual rules. 27 Quinn, J. B. (1985). Managing innovation: Controlled chaos. Harvard

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Business Review, May/June, 73–84. See also Quinn, J. B., Baruch, J. J. & Zien, K. A. (1997). Innovation explosion, New York: The Free Press. 28 Pinchot, G. & Pinchot, E. (1993). Unleashing intelligence. Executive Excellence, 10(9), 7–8. 29 Pinchot, E. & Pinchot, G. (1994). The end of bureaucracy & the rise of the intelligent organisation. San Francisco: Berret-Ko¨hler Publishers, Inc., 62. 30 Robinson, M. (2001). The Ten Commandments of intrapreneurs. New Zealand Management, 48(11), December, 95; Sykes, H. & Block, Z. (1989). Corporate venturing obstacles: Sources and solutions. Journal of Business Ventures, 4(3), May, 159–67; MacMillan, I. C., Block, Z. & Subba Narasimha, P. M. (1986). Corporate venturing: Alternatives, obstacles encountered and experience effects. Journal of Business Venturing, 1(2), 177–91; Lumpkin, G. T. & Dess, G. G. (2001). Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle. Journal of Business Venturing, 16(5), 429–52; Eesley, D. T. & Longenecker, C. O. (2006). Gateways to intrapreneurship. Industrial Management, 48(1), 18–23. 31 Drucker, P. F. (1985). Innovation and entrepreneurship: Practice and principles. London: Pan Books, 21–2, 201, 241. Here is a review of recent literature. Alexandrescu, Filip, Stanislav Martina´t, Petr Klusa´cˇek & Stephan Bartke. The path from passivity toward entrepreneurship: Public sector actors in brownfield regeneration processes in Central and Eastern Europe. Organisation & Environment, 27(2) (2014), 181–201; Borins, S. (2000). Loose cannons and rule breakers, or enterprising leaders? Some evidence about innovative public managers. Public Administration Review, 60(6), 498–507; Brown, Louise. Innovation in public sector services: Entrepreneurship, creativity and management. Public Management Review, 11(3) (2009), 393–4; Hisrich, Robert D. & Amr Al-Dabbagh. Entrepreneurship in the public sector. In Governpreneurship: Establishing a Thriving Entrepreneurial Spirit in Government, edited by Robert D. Hisrich & Amr Al-Dabbagh, 1–22: Cheltenham, UK and Northampton, MA: Elgar, 2013; JungWook, Seo & Chung Soyoon. Impact of entrepreneurship in the public sector: Cheonggye Stream Restoration Project in the Seoul Metropolitan City. Asia Pacific Journal of Public Administration, 34(1) (2012), 71–93; Kearney, Claudine, Robert D.

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Hisrich & Frank W. Roche. Change management through entrepreneurship in public sector enterprises. Journal of Developmental Entrepreneurship, 15(4) (2010), 415–37; Kearney, Claudine, Robert Hisrich & Frank Roche. A conceptual model of public sector corporate entrepreneurship. International Entrepreneurship and Management Journal, 4(3) (2008), 295–313; Nayyar Malik, Javed & Rosli Bin Mahmood. Facilitating corporate entrepreneurship in public sector higher education institutions: A conceptual model. Issues in Social & Environmental Accounting, 6(1/2) (2012), 26–49; Oborn, Eivor, Michael Barrett & Mark Exworthy. Policy entrepreneurship in the development of public sector strategy: The Case of London Health Reform. Public Administration, 89(2) (2011), 325–44; Sundin, Elisabeth. Entrepreneurship and the reorganisation of the public sector: A gendered story. Economic & Industrial Democracy, 32(4) (2011), 631–53; Vogel, Rick. Tracing the quest for performance in Germany’s public sector: Institutional entrepreneurship with rhetorical strategies of persuasion. International Journal of Public Sector Performance Management, 2(2) (2013), 123–40; Yeazdanshenas, Mehdi. Designing a conceptual framework for organisational entrepreneurship in the public sector in Iran. Iranian Journal of Management Sciences: a Quarterly, 7(2) (2014), 351–76. 32 Hisrich, Robert D. & Amr Al-Dabbagh. Governpreneurship: Establishing a thriving entrepreneurial spirit in government. Cheltenham, UK and Northampton, MA: Elgar, 2013. 33 Adapted from Ireland, R. D., Kuratko, D. F. & Covin, J. G. (2003). Antecedents, elements, and consequences of corporate entrepreneurship. Best Paper Proceedings: Academy of Management, August, CDROM: LI–L6; and Ireland, R. D., Covin, J. G. & Kuratko, D. F. (2009). Conceptualizing corporate entrepreneurship strategy. Entrepreneurship Theory and Practice, 33(1), 19–46. 34 Charles Baden-Fuller & Henk W. Volberda. Strategic renewal: How large complex organisations prepare for the future. International Studies of Management & Organisation, 27(2) (1997), 95–120. 35 Collins, J. C. & Porras, J. I. (1996). Building your company’s vision. Harvard Business Review, Sept–Oct, 65–77. 36 See, for example, Schroeder, D. M. (1990). A dynamic perspective on the impact of process innovation upon

competitive strategies. Strategic Management Journal, 2, 25–41; Fiol, C. M. (1995). Thought worlds colliding: The role of contradiction in corporate innovation processes. Entrepreneurship Theory and Practice, Spring, 71–90. 37 Peters, T. J. (1987). Thriving on chaos. New York: Harper & Row. 38 Drucker, P. F. (1985). The discipline of innovation. Harvard Business Review, May–June, 67–72. Donald F. Kuratko, Michael G. Goldsby & Jeffrey S. Hornsby, Innovation Acceleration: Transforming Organizational Thinking. Upper Saddle River, NJ: Pearson/Prentice Hall, 2012. 39 Dent, H. S. Jr. (1990). Reinventing corporate innovation. Small Business Reports, June, 31–42. see also: Donald F. Kuratko, Michael G. Goldsby & Jeffrey S. Hornsby, Innovation Acceleration: Transforming Organizational Thinking. 40 Rao, J. A. Y. Speaking the lingua franca of innovation. IESE Insight 14 (2012), 13–19. 41 Auersweld, P. E., Branscomb, L. M., Demos, N. & Min, B. K. (2005). Understanding private-sector decision making for early-stage technology development. In National Institute for Standards and Technology’s Advanced Technology Program, http:// www.atp.nist.gov/eao/gcr02-841a/ contents.htm. 42 Wikipedia, ‘Thomas J. Watson’, http:// en.wikipedia.org/wiki/Thomas_J._Watson. 43 Howell, J. M. & Higgins, C. A. (1990). Champions of change: Identifying, understanding and supporting champions of technology innovations. Organisational Dynamics, Summer, 40–55; Greene, P. G., Brush, C. G. & Hart, M. M. (1999). The corporate venture champion: A resourcebased approach to role and process. Entrepreneurship Theory and Practice, March, 103–22. 44 Pearce, J. A. II, Kramer, T. J. & Robbins, D. K. (1997). Effects of managers’ entrepreneurial behavior on subordinates. Journal of Business Venturing, 12, 147–60. 45 Menzel, H. C., Aaltio, I. & Ulijn, J. M. (2007). On the way to creativity: Engineers as intrapreneurs in organisations. Technovation, 27(12), 732–43. 46 David Krackhardt. Entrepreneurial opportunities in an entrepreneurial firm: A structural approach. Entrepreneurship Theory and Practice (Spring 1995), 53–70; and Morgan P. Miles & Jeffrey G. Covin. Exploring the practice of corporate venturing: Some common forms and their organizational implications.

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Entrepreneurship Theory and Practice, 26(3) (2002), 21–40. 47 Donald F. Kuratko, Ray V. Montagno & Jeffrey S. Hornsby. Developing an entrepreneurial assessment instrument for an effective corporate entrepreneurial environment. Strategic Management Journal, 11 (1990), 49–58; and Jeffrey S. Hornsby, Donald F. Kuratko & Shaker A. Zahra. Middle managers’ perception of the internal environment for corporate entrepreneurship: Assessing a measurement scale. Journal of Business Venturing, 17 (2002), 253–73. 48 Jeffrey S. Hornsby, Donald F. Kuratko, Dean A. Shepherd & Jennifer P. Bott. Managers’ corporate entrepreneurial actions: Examining perception and position. Journal of Business Venturing, 24 (3), 236–47. 49 Lee, C. (1990). Beyond teamwork. Training, June, 25–32; Wolff, M. F. (1989). Building teams – what works. Research Technology Management, November/December, 9–10; and Francis, D. H. & Sandberg, W. R. (2002). Friendship within entrepreneurial teams and its association with team and venture performance. Entrepreneurship Theory and Practice, 25(2), 5–25. 50 Reich, R. B. (1987). The team as hero. Harvard Business Review, May/June, 81. 51 Kamm, J. B. & Nurick, A. J. (1993). The stages of team venture formulation: A decision-making model. Entrepreneurship Theory and Practice, Winter, 17–27; Hitt, M. A., Nixon, R. D., Hoskisson, R. E. & Kochhar, R. (1999). Corporate entrepreneurship and cross-functional fertilisation: Activation, process and disintegration of a new product design team. Entrepreneurship Theory and Practice, 23, 145–68. 52 Ireland, R. D., Kuratko, D. F. & Morris, M. H. (2006). A health audit for corporate entrepreneurship: Innovation at all levels. Journal of Business Strategy, 27(1), 10–17. See also Olson, P. D. (1990).

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Choices for innovation-minded companies. Journal of Business Strategy, Jan–Feb, 42–6. 53 Austin, J. E., Reficco, E. & School, H. B. (2009). Corporate social entrepreneurship. Harvard Business School. 54 Morrish, S. C., Miles, M. P. & Polonsky, M. J. (2011). An exploratory study of sustainability as a stimulus for corporate entrepreneurship. Corporate Social Responsibility & Environmental Management, 18(3), 162–71. doi: 10.1002/ csr.271. 55 SustainAbility, The social intrapreneur: A field guide for corporate changemakers, http:// www.sustainability.com/library/thesocial-intrapreneur?path¼library/thesocial-intrapreneurs. See also Hemingway, C. A. (2005). Personal values as a catalyst for corporate social entrepreneurship. Journal of Business Ethics, 60(3), 233–49; Schwab, K. (2008). Global corporate citizenship – working with governments and civil society. Foreign Affairs, 87, 107; Grayson, D., McLaren, M. & Spitzeck, H. (eds). (2011). Social intrapreneurs – an extra force for sustainability. A Doughty Centre for Corporate Responsibility Occasional Paper, Cranfield University School of Management. 56 Simms, J. (2008). Innovation’s new frontier. Director (00123242), 62(3), October, 48–53. 57 SustainAbility, The social intrapreneur, 5–6. 58 Porter, Michael E. & Mark R. Kramer. Creating share value. Harvard Business Review, 89(1/2) (2011), 62–77. For a contrarian viewpoint, see Crane, Andrew, Guido Palazzo, Laura J. Spence & Dirk Matten. Contesting the value of ‘creating shared value’. California Management Review, 56(2) (2014), 130–53. 59 Bendigo Bank, Creating shared value – community banking in the 21st century,

http://www.bendigobank.com.au/public/ news-and-media/news/news-archive/ creating-shared-value-communitybanking-in-the-21st-century2. 60 ABC News Breakfast – Mark Kramer & PwC Indigenous Consulting. Written by Shared Value Project – 27 October 2014, http://sharedvalue.org.au/2014/10/watchabc-news-breakfast-mark-kramer-andpwc-indigenous-consulting. 61 Nestle´, Creating shared value, http:// www.nestle.co.nz/csv 62 Pfitzer, Marc, Valerie Bockstette & Mike Stamp. Innovating for shared value. Harvard Business Review, 91(9) (2013), 100–7. 63 Three Great Examples of Shared Value in Action, Forbes, 14 June 2011, http:// www.forbes.com/sites/csr/2011/06/14/ three-great-examples-of-shared-value-inaction. 64 Bhavaraju, N. Dhaka Bank Limited utilizes industry clusters to strengthen local economies and more, http:// sharedvalue.org/groups/dhaka-banklimited-utilizes-industry-clustersstrengthen-local-economies-and-more. 65 Western Union helps NGOs transfer money across the globe, http:// sharedvalue.org/examples/ngo-moneytransfer-program. 66 Meghan Ennes. CEO of Japan’s Kirin Brewery on creating shared value, http:// www.triplepundit.com/2014/02/ interview-ceo-japans-popular-brewerycreating-shared-value-society. 67 Pfitzer, Marc, Valerie Bockstette & Mike Stamp. Innovating for shared value. Harvard Business Review, 91(9) (2013), 100–7. 68 Byrd, J. & Brown, P. L. (2003). The innovation equation: Building creativity and risk taking in your organization. Hoboken, NJ: Jossey-Bass/Pfeiffer. 69 Kathryn Hegar. Modern human relations at work. Cengage Learning, 11th edition, 282.

ENTREPRENEURIAL CASE ANALYSIS

PART 2

A NEW METHOD OF FUNDING VENTURES – EQUITY CROWDFUNDING AT PLEDGEME Jodyanne Kirkwood, University of Otago; Anna Guenther, PledgeMe Anna Guenther, a Master of Entrepreneurship student at the University of Otago, had been researching crowdfunding and the concept of creating a local platform to support the creative and arts communities in New Zealand. By a stroke of good fortune, she found a developer in her own backyard – in Wellington, New Zealand’s capital city – who had been working on just such a tool, so arranged to meet him. The developer, more focused on code than marketing, was a classic ‘techie’ and Anna persuaded him that the project could not fly without her expertise and marketing savvy. She joined the company as director and shareholder, but in 2013 she bought him out and became the sole owner. From there, the company went into capital-raising and expansion mode. By 2015, PledgeMe employed six staff (part-time) and was owned by Anna (46 per cent) and 60 other shareholders. There was a Board of Directors overseeing the company, made up of early investors. Crowdfunding is a tool that helps galvanise a crowd of people to fund a project (normally through the project creator’s social networks). It is a young and growing industry that has been proven internationally, with over 800 platforms worldwide. The growth and scope of crowdfunding is impressive considering the industry was unheard of until 2008. The first crowdfunding website, Sellaband, appeared in 2006. Since then, there has been a steady progression of funding ideologies around crowdsourcing, with a move from micro-financing to micro-lending in 2005, to peer-to-peer lending in 2006 and then to crowdfunding (pleasefund.us, 2011). Other key

Entrepreneurial case analysis

players have entered the industry, with the main global market share covered by Kickstarter, Indiegogo and Rockethub. PledgeMe started crowdfunding in the creative industry, comprising everything from design, fashion and film, to music, performing arts and gaming. For a nation of 4.5 million people, New Zealand punches above its weight (think Peter Jackson and the Lord of the Rings movies), where the creative community is quite large and well supported. PledgeMe’s mission is ‘to help Kiwis fund things they care about’, and Kiwis do care about art. Two-thirds of New Zealanders believe that art is a part of everyday life (Creative New Zealand 2008). Over NZ$100 million (US$76 million) of funding from all sources goes into creative projects every year. Creative New Zealand alone funds over 500 projects per year, with an average project amount of NZ$15 000. However, even this amount is not enough to satisfy the creative demand. Previously, many creative projects had to be privately funded in the hopes they could recoup their investment once they had a saleable product. Crowdfunding changed this and allowed people to raise the funds they needed up front in order to develop their creative product. PledgeMe’s business model is simple. It charges 5 per cent of the project total as a success fee, as well as a credit card handling fee of about 2.8 per cent. To date the company has raised over NZ$5.5 million for over 800 campaigns. The organisation has two kinds of customers: the project creator and the project funder. The creators

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come mainly from various backgrounds, and the funders are from their social networks (family, friends and networked acquaintances). Everyone is a stakeholder, as every project creator and funder is integral to the success of the projects. Project creators publish their plans online and raise money from funders in exchange for rewards, normally stemming from the proposed finished project. These rewards range from tickets to a show and dinner with the cast, to smaller items such as postcards. PledgeMe only takes its cut when projects are successful and reach their target. In the industry this is called a ‘threshold model’, namely reaching the least amount set by the creator for it to be successful. This amount has to be chosen with care as the Campaign Creator will be obliged to fulfil all rewards that are claimed once this goal has been met. It means that PledgeMe has to help projects meet their targets, both by providing support to the consumers, educating the public on crowdfunding and by marketing the project. PledgeMe has the following core values that underlie its operation: • Community: Crowdfunding helps connect individuals with supporters to realise their goals, and will potentially revolutionise existent community and economic models. • Passion: The main driver for PledgeMe staff and project creators. • Creativity: The main focus of the business, which is reflected in every aspect of the company. In 2015, PledgeMe was three years old and had established itself a leading presence in the crowdfunding market, which was a good time to diversify. An opportunity arose that was too good to turn down. New Zealand changed its laws in April 2014 to allow ‘equity crowdfunding’. Companies could crowdfund in exchange for giving shareholders a portion of equity (shares) in their company. This was a huge opportunity for PledgeMe, but also a very daunting one in that Anna realised she would have to grow the company in order to offer equity crowdfunding. Previously, it had been Anna, her business partner, one part-time administrator and various interns who managed the whole company, but they needed to hire staff. To do this, Anna had to get more investors and, therefore, give up some of her own equity. Initially, a round of private investment was undertaken, and NZ$100 000 was raised. Following this in 2014, the previous Advisory Board was turned into a formal Board of Directors and a further NZ$100 000 was raised in 23 hours by equity crowdfunding itself. Currently the business has around 60 shareholders. In 2015, the

Entrepreneurial case analysis

company was looking at another capital raising round in order to grow further. There are now four companies who hold New Zealand government-issued equity crowdfunding licenses (including The Snowball Effect, Armillary Capital and Equitise) with another few companies about to begin. Therefore, competition is heating up. In fact, some believe that in the longer term New Zealand really only has room for about two equity crowdfunding providers (Daniel, 2015). Meanwhile, with little or no marketing, PledgeMe have had over 500 companies approach them about possibly using the site for equity crowdfunding. Australia is also looking at changing its laws to allow this as well. In New Zealand, there is a limit of NZ$2 million/year per company that can be crowdfunded. In total, as of April 2015, there have been nine successful campaigns in New Zealand by two equity crowdfunding platforms, raising funds for a diverse range of companies such as a brewery, a winery and within technology. For a very young industry, equity crowdfunding is going well; however, there are still those who are yet to be convinced and say that investors should be cautious (Adams, 2015). The first company to be successfully equityfunded in New Zealand was in 2014 and it is fair to say that New Zealand investors are still trying to assess this mode of financing, and are waiting for a track record of success prior to investing. PledgeMe currently has three campaigns that are ‘live’ at present, and all are on track to meet their target. Companies seeking investment do not receive any funds if they do not meet their target. As with creative crowdfunding, PledgeMe receives a 5 per cent success fee for raising the funds (in the industry fees range from 5–6 per cent depending on the company you use). For PledgeMe, one of the biggest challenges in entering the equity crowdfunding market was whether their current brand would be suitable to extend to the new part of the business. There was much debate about whether to re-brand or not. It was agreed that keeping the strong PledgeMe brand was appropriate, as the mission for both sides of the business is the same: helping people to fund things they care about. This applies equally to creative projects as it does to businesses needing investors.

Discussion questions 1

Starting a business with another person is a common pathway to an entrepreneurial venture. What are the benefits of having a business partner? What are some of the problems in starting a business with a business partner? What do you suppose were the conflicts between Anna and the original developer?

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2

3 4

5 6

Do you think PledgeMe’s decision to enter into equity crowdfunding was wise, or should it have stayed with the original threshold model? Do the two parts of the business (the threshold model and the equity model) complement each other well? Now that the founder owns less than half of the company, how easy or difficult do you think it will be to develop new entrepreneurial ideas within the company? Will PledgeMe be able to remain innovative and fast moving now that it has many shareholders? It’s clear that the shareholders and founders need to have a logical framework to allocate equity to the various players and to recover equity from people who separate from the company. Have a look at the online Startup Equity Calculator at http://foundrs.com/. Fill it out from three perspectives: Anna herself, the original developer and current investors in the company. Should the original developer own half the company? If someone left, how does this impact the company? Should the investor pitch-person have higher equity? How would you calculate sweat equity (value created voluntarily by hard work in the company)? (See Advani, 2007)

References Adams, C. (2015). Crowdfunding taking off, but beware. New Zealand Herald. 7 April 2015. Retrieved from

Entrepreneurial case analysis

http://www.nzherald.co.nz/business/news/ article.cfm?c_id¼3&objectid¼11428583 on 7 April 2015. Advani, Asheesh. What is sweat equity worth? Entrepreneur 31 July 2007, Retrieved from http:// www.entrepreneur.com/article/182440. Creative New Zealand. (2008). New Zealanders and the arts: Attitudes, attendance and participation in 2008. Retrieved from http://www.creativenz.govt.nz/en/news/ brand-new-research-on-new-zealanders-arts-attitudesattendance-and-participation. Creative New Zealand. (2011). Annual Report, 2010/2011. Wellington: Creative New Zealand. Daniel, J. (2015). Equity crowdfunding ‘shake-out’ predicted. New Zealand Herald, 10 April 2015. Retrieved from http://www.nzherald.co.nz/business/news/ article.cfm?c_id¼3&objectid¼11430249 on 21/4/2015. Pleasefund.us (2011). A very short introduction to crowdfunding with Pleasefund.us. Retrieved from http:// www.crowdsourcing.org/images/PleasefindusCrowdfunding-Infographic.jpg. www.pledgeme.co.nz. An earlier version of this case was presented at the USASBE (United States Association of Small Business and Entrepreneurship) annual conference, 9–12 January 2014, Fort Worth, Texas, USA. Winner of Best Teaching case award.

»

PART « THREE

DEVELOPING ENTREPRENEURIAL VENTURES

CHAPTER 9

CHAPTER 10

CHAPTER 11

CHAPTER 12

The assessment of entrepreneurial opportunities

Marketing for entrepreneurial ventures

Strategic entrepreneurial growth

Global opportunities for entrepreneurs

Entrepreneurship

» CHAPTER NINE THE ASSESSMENT OF ENTREPRENEURIAL OPPORTUNITIES CHAPTER OBJECTIVES

1 A wise man will make more opportunities than he finds.1 Francis Bacon The reason a lot of people do not recognise opportunity is because it usually goes around wearing overalls looking like hard work. Thomas Edison

To understand that assessing an opportunity requires various techniques including both analysis and active learning

2 To distinguish Internet opportunities from other opportunities 3 To recognise common pitfalls in taking new venture ideas to the marketplace 4 To identify critical factors involved in new venture development 5 To examine the opportunity landscape and the factors that underlie and promote entrepreneurial opportunities 6 To assess industry value chains and ecosystems from an opportunity perspective 7 To examine Porter’s five forces model of competitive market analysis 8 To compare opportunity profile analysis methods 9 To be alert to how an entrepreneurial ecosystem contributes to the opportunity landscape

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

Chapter 9: The assessment of entrepreneurial opportunities 291

THE ELEMENTS OF AN OPPORTUNITY ASSESSMENT In this chapter we are interested in how to assess whether an innovative idea is truly a feasible opportunity worth pursuing. Success depends on a complex triad of key factors: (1) characteristics of the entrepreneur – personal reasons for start-up; (2) the opportunity landscape that embodies the characteristics of the opportunity such as trends, risks, market size and resource availability; and (3) the nature of the venture itself – differing scalability, growth potential and performance.2 This complexity often makes assessment, evaluation and ultimate commercialisation of new ventures very tricky to analyse in advance. But it is ‘do-able’ and this chapter reveals some of the tried and tested ways to check that an idea has a high potential of being an opportunity to build a profitable, sustainable product or service with a high chance of business survival. Israel Kirzner’s theory of alertness asserts that entrepreneurs are more alert to new opportunities than other people.3 The entrepreneur is an opportunity identifier who can spot unexploited market niches in advance of other people. Entrepreneurs depend on a broad range of sources of ideas, networks and relationships from which to draw knowledge about future markets and technologies. Entrepreneurs can be more successful with spotting opportunities when they closely examine the available information that supports an idea while simultaneously accessing social networks to better inform and shape the idea into an opportunity.4 Less experienced entrepreneurs can also benefit from the application of an active and organised search routine.5 Entrepreneurs can be highly opportunistic and often move quickly to realise an opportunity before it is lost. The problem is that opportunities differ across markets, technologies and situational contexts6 while the perception of opportunities can differ among individuals, depending on factors like gender,7 emotional state8 and selfconfidence.9 Therefore, entrepreneurs must understand and train themselves in how to rapidly assess whether a new idea is in essence an opportunity while taking into account variations across contexts, sources of ideas and personal factors.

HOW DO WE MODEL THE ENTREPRENEURIAL PROCESS? There is no shortage of ideas. Ideas are everywhere and easy to find. We see them while standing at a bus stop, or think of them in the shower. But viable opportunities are less easily found. Rarer still are highly viable commercial opportunities. Ideas come relatively easily; identifying an entrepreneurial opportunity though raises the bar. What is an entrepreneurial opportunity? As discussed in Chapter 5, the origins of an opportunity come as a result of ideas and more promising ideas are frequently generated by a creative process and intuition rather than from scientific analysis. An entrepreneurial opportunity occurs when an entrepreneur recognises and substantiates the potential within that idea for a new enterprise to provide a social or business product and/or service that solves a real problem or adds value for a customer. This is where analysis starts. The best business opportunities may well be ones that solve the problems of everyday life, sometimes referred to as the ‘pain’ point. What ‘pain’ does a customer experience regularly? How are they solving that ‘pain’ now? Does your product or service solve that ‘pain’ better than the competitors’? If the idea solves a problem or adds value then it is potentially a highly attractive entrepreneurial opportunity.10 We know that people find opportunities more often in industries with which they are familiar.11 Familiarity with an industry boosts confidence which is also a predictor of moving into business start-

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up.12 There seems to be a correlation between having weak ties (networks outside of the strong ties – friends and family) and the number of ideas that an entrepreneur recognises.13 Some researchers see the entrepreneurial process both as a planned activity and as a serendipitous phenomenon.14 We launch into this chapter by considering Australian Professor Kevin Hindle’s model of the entrepreneurial process,15 which argues that exploitation of an opportunity involves a jerky process of jumping between assessment and exploring the opportunity, evaluating it, creating a business model and then moving from commitment to the actual achievement of value, be it business or social (see Figure 9.1). The dual-direction arrows at the bottom mean that value is connected to each other element and indicate that the entrepreneurial process encompasses feedback via monitoring. Once value is achieved, the entrepreneurial individuals, or a team, can reconsider the usefulness of the exploitation scheme that they chose and implemented, and begin a process of reassessment (working back through the model). Opportunity existence

FIGURE 9.1 HINDLE’S ENTREPRENEURIAL PROCESS MODEL

Discovery Entrepreneurial capacity

GENERIC

EVALUATION

Strategic domain

CONTEXTUAL Discovery

Business model Personal domain

Psychological capacity Commitment

Managerial capacity

Exploitation Output

Tactical domain

Feedback Value

Source: Redrawn with the assistance of Professor Hindle. Originally appeared in Hindle, K. (2010). Skillful dreaming: Testing a general model of entrepreneurial process with a ‘unique’ narrative of business formation. In William B. Gartner (ed.). Entrepreneurial Narrative: Theory, Ethnomethodology and Reflexivity. Clemson SC: Clemson University, 97–136. Copyright ª 2010 by Clemson University. Used by permission.

The entrepreneurial process can therefore either repeat itself or it can transform into a process of ‘simply’ managing the now-established business. Moving from top to bottom of Figure 9.1, we move from the conceptual to the practical, from a perceived opportunity (based on an idea) to a real operating venture producing value. The process

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includes three interrelated categories, or domains of activity (on right): the strategic, the personal and the tactical. Each domain requires a distinctive capacity (on left): entrepreneurial capacity (evaluating the opportunity and developing the business model), psychological capacity (behaviours and commitment) and managerial capacity (such as accounting and marketing). In the beginning, the journey is one of discovery, which can actually be done by someone other than the entrepreneur. The central function – that distinguishes entrepreneurs from other people – is evaluation. All the contextual factors that may influence value creation are uncovered, evaluated, tested and verified. Rotating arrows mean that the evaluation process is iterative or repetitive. Discovery (or perhaps disappointment) comes at each ‘turn of the wheel’. Some procedures are generic (occur in every evaluation large or small); some are contextual and relate to specific circumstances. In the opportunity assessment process, an entrepreneur seeks to identify risks and uncertainties for which strategies can be developed to either manage risks or reduce uncertainty. At one extreme, risks may be unmanageable and uncertainty intolerable, in which case the opportunity may be abandoned – at least in the near term or until conditions and circumstances change. At the other extreme, risks may be minimal or easily manageable, in fact so easily manageable that it renders the venture mundane and easily replicated. While uncertainty can never totally be eliminated, at some point the risk for potential reward is tolerable, hence, actions may be taken to progress towards new venture creation. After evaluation, the entrepreneur creates a business model or the business design. This is the stage where you are assured that ‘you [will] create value and capture a portion of that value for yourself’.16 There are two more important activities in the process. The entrepreneur or entrepreneurial team must express their commitment to undertake obligations and accept the eventual consequences. But commitment means nothing unless you proceed to exploit it. The ‘exploitation literature’ is nothing less than the field of business management itself. At the bottom of Hindle’s model, the process can either repeat itself or transform into a process of managing the now-established business system. Before we proceed, there is one trap that you should be wary of. Would-be entrepreneurs are in serious danger of falling victim to ‘analysis paralysis’. This means so over-evaluating an opportunity that a decision or action is never taken, in effect paralysing the entrepreneur from taking action. This can be one of the biggest obstacles to entrepreneurial activity and will undermine entrepreneurial ambition and breed procrastination to the extent that a venture may never start. The analysis work covered in this chapter (and in the book more generally) is designed to give you thinking tools to assist you to decide whether the opportunity is realistic or not and whether to move forward. At some point, however, you must come to terms with the fact that gathering information is an ongoing process and it needs to be intertwined with reasoned and guided steps towards meeting your ambition to start the venture. In other words, an entrepreneur will never be in a position to have all the facts, and to be entrepreneurial means working with and being comfortable with the uncertainty that accompanies this type of activity. Using the tools presented in this book progressively and regularly while simultaneously acting in ways that bring the venture closer to reality and combines the doing and thinking or active learning that is quite typical of how entrepreneurs operate.

HOW TO ASSESS AN OPPORTUNITY In this chapter we delve into the landscape of opportunity within the context of the political, economic, social, technological and industrial forces that influence it. Part of assessing opportunity is the appreciation of how these dynamics affect the opportunity. Do they support or hinder it? The analysis will help you place the opportunity into an external world context and identify risks and

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uncertainties. It will help you to identify the questions you need to ask and where to look for answers. So, how do you recognise a highly profitable and viable venture opportunity when you see one? There are certain tried and tested heuristics or, simply put, ‘rules of thumb’ that can be put into practice, such as those in the following list.17 • Choosing suitable, exploitable markets. Do not go after the software operating system market unless you are prepared to fend off and can beat Microsoft. Similarly, the search engine market may well be occupied. Mainstream markets are difficult for entrepreneurs to break into. • Choosing niche markets that cater for specialist needs. The Body Shop started up by appealing to environmentally aware cosmetics customers. Patagonia adopted an ‘organic cotton only’ policy before others were thinking about sustainability. • Opening new markets. The smartest entrepreneurs see emerging trends early and manoeuvre themselves into the cash flow. David Hall says, ‘I have a rule of thumb: Find any market growing at 25 per cent a year or more and you can be sure there are many new niche markets continuously being created’. • Steering clear of overcrowded marketplaces. Look for pickings elsewhere. Become a big fish in a small pond. • The reverse is also true. Small fish in a really big pond have the opportunity to capture market share. • Offering a unique product or service. Though infrequent, the entrepreneur may discover some technical breakthrough protected by a patent. Beyond these practical tips, we would like to provide some techniques to examine whether an opportunity fits into one of these patterns. Avoid thinking that an entrepreneurial opportunity will arrive on a silver platter. Often they are a work in progress and the job of the entrepreneur is to craft, reflect and shape the opportunity to fit into a winning pattern.

CRITICAL FACTORS IN OPPORTUNITY ASSESSMENT

Go online to see a newventure idea checklist

You cannot evaluate what you do not measure. The old adage ‘that which gets measured gets done’ is no less true of opportunity evaluation. A number of critical factors are important for new-venture assessment. One is to have a checklist that provides key questions to be answered to forewarn of problems and to illuminate alternatives. In most cases, however, such a questionnaire approach is too general. The assessment must be tailor-made for the specific venture. Our major focus is the pre-start-up and start-up phases, because these are the principle activities of an entrepreneur. During these phases, you should consider five factors: (1) relative uniqueness of the venture, (2) size of investment needed to get established and survive the pre-sales start-up phase, (3) expected growth of sales and/or profits that can generate cash flow as the venture moves through its start-up phase, (4) extent to which products are ready and available for sale during the pre-start-up and start-up phases and (5) availability of customers during the pre-start-up and start-up phases.

Uniqueness A new venture’s range of uniqueness or novelty can be considerable, extending from fairly routine to highly non-routine. What separates the routine from the non-routine venture is the amount of innovation required during pre-start-up. This distinction is based on the need for new process

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technology to produce services or products and on the need to service new market segments. Venture uniqueness is further characterised by the length of time a non-routine venture will remain nonroutine. For instance, will new products, new technology and new markets be required on a continuing basis? Or will the venture be able to ‘settle down’ after the start-up period and use existing products, technologies and markets?

Investment The capital investment required to start a new venture can vary considerably. In some industries relatively small sums may be required (less than AU$50 000), whereas in other industries millions of dollars are necessary. Moreover, in some industries only large-scale start-ups are feasible. To illustrate the difference, in the publishing industry, one can start a small venture that can remain small or it can grow into a larger corporation. By contrast, an entrepreneur attempting to break into the airline industry could need a considerable up-front investment. Another finance-related critical issue is the extent and timing of funds needed to move through the venture process. To determine the amount of needed investment, entrepreneurs must answer questions such as these: 1 Will industry growth be sufficient to achieve break-even sales to cover a high fixed-cost structure during the start-up period? 2 Are substantial financial reserves available to protect a large initial investment? 3 Are networking contacts present to take advantage of various opportunities? 4 Do your industry and entrepreneurial track records justify the financial risk of a large-scale start-up?18

Growth of sales The growth of sales through the start-up phase is another critical factor. Key questions are: 1 What is the growth pattern anticipated for new-venture sales and profits? 2 Are sales and profits expected to grow slowly or level off shortly after start-up? 3 Are large profits expected at some point with only small or moderate sales growth? Or are both high sales growth and high profit growth likely? Or will initial profits be limited with eventual high profit growth over a multi-year period? In answering these questions, it is important to remember that most ventures fit into one of the three following classifications. A lifestyle venture appears to have independence, autonomy and control as its primary driving forces. Neither large sales nor profits are deemed important beyond providing a sufficient and comfortable living for the entrepreneur. In a small profitable venture, financial considerations play a major role. Additionally, autonomy and control are important. The entrepreneur does not want the venture to become so large that they must relinquish equity or an ownership position, and therefore give up control over cash flow and profits, which, it is hoped, will be substantial. In a high-growth venture, significant sales and profit growth are expected to the extent that it may be possible to attract venture capital money and funds raised through public or private placements.19 Growth of sales is determined by understanding the trends that support a venture. Of course knowing the customer, where they are, how many there are and how you can reach them will also be vital information towards an understanding of sales growth potential. This will be covered in Chapter 10.

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Product availability Essential to the success of any venture is product availability; that is, the availability of a saleable good or service, at the time the venture opens its doors. Some ventures have problems in this regard because the product or service is still in development and needs further modification or testing. Other ventures find that because they bring their product to market too soon, it might be recalled for further work. A typical example is the software company that rushes the development of its product and is then besieged by customers who find bugs in the program. Lack of product availability in the finished form can affect the company’s image and its bottom line. To analyse this critical factor you need good insight into your product or service development strategy and will need to have a realistic development plan and schedule. This is where experience really helps.

Customer availability If the product is available before the venture is started, the likelihood of venture success is considerably better than otherwise. Similarly, venture risk is affected by customer availability at start-up. At one end of the risk continuum is the situation where customers are willing to pay cash for products or services before delivery. At the other end of the continuum is the enterprise that gets started without knowing exactly who will buy its product. A critical consideration is how long it will take to determine who the customers are, what their buying habits are and how much they will pay. As Ronstadt notes: The decision to ignore the market is an extremely risky one. There are, after all, two fundamental criteria for entrepreneurial success. The first is having a customer who is willing to pay you a profitable price for a product or a service. The second is that you must actually produce and deliver the product or service. The farther a venture removes itself from certainty about these two rules, the greater the risk and the greater the time required to offset this risk as the venture moves through the pre-start-up and start-up periods.20

We deal more substantially with analysing the customer in Chapter 10, but in keeping with the idea of balancing analysis with action you may want to check out a useful web resource. The emerging start-up methodologies like Lean Startup suggest that entrepreneurs develop a series of hypotheses that are tested with customers and the market place. This ‘hypothesise and test’ approach keeps you close to the customer and their problem(s) that your business is seeking to address. To find out more about hypothesis building and testing you may like to explore the Javelin Experiment Board at: http:// www.ywanvanloon.com/javelin-experiment-board-content-marketing-for-the-travel-industry.

WHEN IS AN IDEA NOT AN OPPORTUNITY? Assessing whether an idea is a potential entrepreneurial opportunity is the first key area of analysis in the new-venture process. This stage of transitioning an idea can be the most critical for understanding new-venture development. The following are seven of the most common pitfalls encountered in the process of assessing whether a new venture idea is an opportunity. • Lack of objective evaluation: Many entrepreneurs lack objectivity. Engineers and technically trained people are particularly prone to falling in love with an idea for a product or service. They seem unaware of the need for the scrutiny they would give to a design or project in the ordinary course of their professional work. The way to avoid this pitfall is to subject all ideas to rigorous study and investigation.21 • No real insight into the market: Many entrepreneurs do not realise the importance of developing a marketing approach in laying the foundation for a new venture. They show a managerial

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•

•

•

•

•

short-sightedness.22 In addition, they do not understand the life cycle that must be considered when introducing a new product or service. No product is instantaneously profitable, nor does its success endure indefinitely. Entrepreneurs must not only forecast the life cycle of the new product, but also recognise that introducing the product at the right time is important to its success. Timing is critical. Action taken too soon or too late will often result in failure. Inadequate understanding of technical requirements: The development of a new product often involves new techniques. Failure to anticipate the technical difficulties with developing or producing a product can sink a new venture. Entrepreneurs cannot be too thorough when studying the project before initiating it. Encountering unexpected technical difficulties frequently poses time-consuming and costly problems. Poor financial understanding: A common difficulty with the development and introduction of a new product or service is an overly optimistic estimate of the funds required to carry the project to completion. Sometimes entrepreneurs are ignorant of costs, or are victims of inadequate research and planning. Quite often, they tend to underestimate development costs by wide margins. It is not unusual for actual revenues to be less than half of what was forecast. By the same token, expenses can actually be up to as much as double those expected. Lack of venture uniqueness: A new venture should be unique. Uniqueness is the special characteristics and design concepts that should draw the customer to the venture and should provide performance or service superior to competitive offerings. The best way to ensure customer awareness of differences between the company’s product and competitors’ products is through product differentiation. Pricing becomes less of a problem when the customer sees the product as superior to its competitors. A product that is unique in a significant way can gain the advantage of differentiation. Ignorance of legal and regulatory issues: Business is subject to many legal and regulatory requirements. One is the need to make the workplace safe for employees. A second is to provide reliable and safe products and services. A third is the necessity for patents, trademarks and copyrights to protect one’s inventions and products. A fourth is to take into account the varying regulatory environments in which Asia–Pacific entrepreneurs operate. When legal and regulatory issues are overlooked, major problems can result. Lack of insight regarding industry structure: Understanding the dynamics of the industry you wish to enter with a new venture is paramount for assessing the opportunity. Not being aware of the issues of control and power within an industry value chain may mean that, even with a great product that customers or end users are willing to purchase and pay for, a business can fail because of the power of suppliers, distributors or other competitive forces. A start-up business is vulnerable to issues of cash flow, access to markets and customers and the tactics of entrenched competitors with cash to splash or with heavy investments at risk if a challenging new venture succeeds. When these issues are stacked against an entrepreneur, it means they need to either find the means to stay out of harm’s way or under the radar or keep the idea in the drawer; it may not be a profitable or sustainable opportunity.

THE EVALUATION PROCESS A critical task when starting a new business enterprise is conducting solid analysis and evaluation of the feasibility of the product/service idea before getting off the ground. Entrepreneurs must put their ideas through this analysis to discover if the proposals contain any fatal flaws. In the next sections of this chapter we examine ways to evaluate ideas and assess the opportunity landscape.

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ANALYSING THE OPPORTUNITY LANDSCAPE Today we all live in a global economy. Few businesses are immune from the external elements resulting from government, political, economic, social and technological forces. Small businesses are perhaps more vulnerable to these external elements than larger businesses as they often have little capacity in the way of resources and diversity of operation to cope with the impact of rapid change. Conducting an opportunity landscape analysis systematically examines the external conditions that both shape and influence an opportunity. It is based fundamentally on the Political, Economic, Social and Technology (PEST) factors and trend analysis which has become more sophisticated over the years. It has evolved into a STEEP analysis (Social, Technological, Environmental, Economic and Political analysis) and yet others have labelled it the PESTLE analysis (Political, Economic, Sociocultural, Technological, Legal and Environmental analysis). In the case of both the STEEP and PESTLE, the environment in terms of the ecological soundness and impact of the opportunity features, while the PESTLE also adds the specific legal or regulatory influences on the opportunity. The first step of an opportunity landscape analysis is to examine all of these same elements to help the entrepreneur to: • locate the source of the opportunity or the changing conditions that present the opportunity • identify the size of the likely market needs that may arise from these changing conditions and the extent of change or momentum • identify the likely duration of the need and how the conditions will influence the timing of the opportunity • locate the trends which create new needs and may show how the need will increase or decrease over time • indicate the emerging issues, values or lifestyles which uncover emerging needs. The opportunity landscape analysis sets out the major proposition as to why a business proposal exists. Conducted well, it will provide and reveal verified sources of data to prove underlying assumptions about market size and customer need. It will help to validate to others that the opportunity is real and exists. Better opportunities have the political, regulatory, social, environmental and technological winds of change blowing in the same prevailing direction.

ASSESSING THE INDUSTRY ENVIRONMENT We now move on to noted strategist Michael E. Porter’s well-known approach to assessing industries. Porter’s first question is: what is the structure of the industry and how is it likely to evolve over time? If the entrepreneur’s business is not in an attractive industry – and we will show how to measure its attractiveness – then the person may want to get out of it or redefine it. Porter’s second question is: what is the company’s relative position in the industry? No matter how attractive the game is, entrepreneurs will not do well if their company does not hold a good position in it. Conversely, the business can be in a lacklustre industry with low average profitability, yet if it occupies exactly the right niche it can perform well. ‘Most small companies, of course, cannot change an industry’s structure. What they can do, however, is establish a good position in the industry, a position based on sustainable competitive advantage’, Porter says.23

UNCERTAINTY ANALYSIS Although industries vary in size and development, certain characteristics are common to new and emerging industries that today’s entrepreneur needs to consider. These tend to increase uncertainty as opposed to risk because the only way these can be resolved is through careful and mindful

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participation in the industry. Unlike risks, there is little one can do to mitigate uncertainty as there is no past experience of it to rely on. The most important of these uncertainties are outlined below. • Technological uncertainty: A great deal of uncertainty usually exists about the technology in an emerging industry. Which product configuration will ultimately prove to be the best? Which production technology will prove to be the most efficient? How difficult will it be to develop this technology? How difficult will it be to copy technological breakthroughs in the industry? • Strategic uncertainty: Related to technological uncertainty is a wide variety of strategic approaches often tried by industry participants. Since no ‘right’ strategy has been clearly identified, industry participants will formulate different approaches to product positioning, advertising, pricing and the like, as well as different product configurations or production technologies. • First-time buyer uncertainty: Buyers of an emerging industry’s products or services are perfectionist first-time buyers. The marketing task is therefore one of substitution, or getting the buyer to make the initial purchase of the new product or service. • Short-time horizon and strategic uncertainty: In many emerging industries, the pressure to develop customers or produce products to meet demand is so great that bottlenecks and problems are dealt with expediently rather than on the basis of an analysis of future conditions. Short-run results are often given major attention, while long-run results are given little consideration, creating strategic uncertainty.

FACING YOUR FEARS! The inner journey to the creation of an entrepreneurial venture can be even more stressful than the external process of developing a business plan and searching for capital. Building up the courage to quit a job and start a new venture can sound easy and yet pose enormous emotional challenges when the actual events are about to unfold. One consultant, Suzanne Mulvehill – author of Employee to Entrepreneur and host of her own radio talk show – suggests particular strategies to follow when confronting the emotional challenges of entrepreneurial start-ups. She coined the term ‘emotional endurance’ to signify the inner strength that is needed to make the jump from job to venture. Following are a few of the more significant strategies that may help entrepreneurs move through the emotional journey. 1 2 3

4 5

6

ENTREPRENEURIAL EDGE

Say yes to your yearning. In other words, acknowledge the desire you are experiencing to venture out on your own. It all begins with accepting the possibility that it could happen. Visualise your success. Creating a vision of what could be, may be a powerful motivator to what will be. It is important to write down this vision so it has tangible reality in this early stage. Evaluate your beliefs. On a sheet of paper, list all of your beliefs about money, business and yourself. Then, in a similar column, write down how you would like to view money, business and yourself. Compare these beliefs and decide how far apart they are and why. Do what you love. There is no replacement for passion. What you love is what will drive you to succeed, even in the tough times. Develop your business ideas around the types of things that you absolutely love to do. Get educated. Avoid the myths that education saps out any desire to be an entrepreneur. That may have been true 20 years ago, but we have come a long way in our approaches to business education. Entrepreneurship education is the hottest subject in universities worldwide. Remember, knowledge is power. Eliminate excuses. Whenever you hear yourself make an excuse for not doing something, write it down and examine it later. Become aware of common excuses you may be using that have no real foundation. Turn your ‘I can’ts’ into open-ended questions that allow you to explore the possibilities rather than shut the door.

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7

Know that there is no ‘right time’. Waiting for the proverbial perfect time is a trap that many people fall into, only to find later that time passed them by. The only guarantee we have about time is that it continues, with or without us. Rather than wait, you need to proactively move on your idea. 8 Start small. It is always better to be realistic and reach for what you can accomplish in the near future. The longerterm future may hold greater things for the venture, but at the beginning you need to avoid being overwhelmed. 9 Answer the ‘what ifs’. Stop for a moment and write down all of the ‘what ifs’ that you question yourself with. See if you can begin to logically answer the questions. It’s amazing how much courage will be gained by analysing these contingencies. 10 Ask for help. Reach out and find help. The maverick entrepreneur is a myth of the past. Today, there is so much assistance available if you are willing to seek it. Ignorance is not asking questions; rather, ignorance is being arrogant enough to think you have all the answers. Source: Adapted from Suzanne Mulvehill, ‘Fear factor: what’s really holding you back from starting your own business?’, Entrepreneur, April 2005, 104–11. Published by Entrepreneur Media, Inc., ª 2005.

VALUE CHAIN ANALYSIS Evaluating the industry environment is a critical step in the overall opportunity landscape analysis for a new venture. The first consideration in this analysis is to look at the industry value chain. Most people when they think about a business selling products and services tend to think about the products and services familiar to us all as consumers. Often there is only one link of a value chain in people’s mind, that of the business with the consumer or end user. This is actually far from reality. (See the Entrepreneurship in Practice ‘Natural capital in a can of cola’ in Chapter 14.) Any business is set within an industry value chain or network of suppliers and buyers and may occupy different positions along that chain. Each position or link in the chain in simple terms carries the cost imposed upon it by the upstream suppliers and contributes to the costs of each of the downstream purchasers. Therefore, each link must be able to purchase its supplies and sell its goods or services at a profit margin that enables the whole chain to produce, distribute and deliver the good/service to the end user at a price the end user is willing to pay. A simplified chain is shown in Figure 9.2. FIGURE 9.2 A SIMPLIFIED INDUSTRY VALUE CHAIN

Raw materials

Producer

Distributor

End user

The industry value chain has within it all the business entities that bring components and ingredients into the company and move completed products/services out of the company to the final consumer. The number of links in the chain, or steps in the channel, represents the complexity of the industry value chain. Often companies will use several channels to reach different segments of the market making the value chain more complex. Each link in the industry value chain can also exert influence on its upstream and downstream channel associates and some opportunities can be adversely affected by the nature of these influences. For example, in Australia two major retailers exert high influence in the fast-moving consumer goods markets, Woolworths and Coles. If you are a producer of goods that uses the supermarket channel to reach the end user, you may find yourself in a weak position as the supermarkets often control much of the purchasing and shelf positioning decisions for products that are stocked and displayed. Effectively the supermarket retail outlet may stand between you and the consumer of your products and be a controlling influence in the level of exposure, price points and general customer reach. This type of barrier can be overcome, but most likely at the expense of

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deeply slashing your wholesale price. In making decisions around the channels to market, there are likely to be trade-offs and this becomes part of your assessment. Of course there are other ways to reach customers and the Internet presents the opportunity for online commerce direct to consumers that may shorten the path to market. Each link provides a function and the question remains whether you can afford to do without that link and function while still maintaining an effective presence and reach to your target market. Of course industries are far more complex than the simplified view given above and in some ways it may be better to consider the more holistic view of an industry web or system.24 Figure 9.3 depicts the complexity that may exist within in an industry structure. An example may be drawn from the timber industry whereby the producer in Figure 9.3 may be the saw miller. The supplier may be the forest manager who sells the raw material and who may be distinct from the forest owner. The electricity utility provider, fuel and labour providers may serve many members of the value chain. Clearly any and all of these suppliers will influence the quality, volume and price of the finished product. Stepping higher we see that the entire value chain could be described as an industrial metabolism, composed of all the physical processes that convert raw materials and waste, including natural capital (see Chapter 3). The more complex the industry system, the more factors are introduced that may influence sales, growth and performance of the business. FIGURE 9.3

THE MORE COMPLEX INDUSTRY VALUE WEB

Exports

Paper retail Support services, e.g. • Planning • Consultancies • Information

Pulp and paper industry Printing

Forest owners Transport Biorefinery Raw materials

Built infrastructure

Saw mills Value-added building materials

Support industries, e.g. • Breeding/genetics • Hauling • Harvesting

Construction and building

Garden retail Residual products, e.g. • Mulch Garden supplies

Electricity

Labour

Fuel

Source: Adapted from Ahlqvist, T., Vanderhoek, N., Dufva, M., Kettle, J., Valovirta, V., Kivimaa, A. & Loikkanen, T. (2013). South Australian Cellulosic Value. Chain Technology Roadmap. VTT, Finland. Published by VTT, Finland, ª 2013. Available at http://www.dmitre.sa.gov.au/page/view_by_id/319.

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Understanding an industry may present opportunities that are not based upon the production of goods within a particular industry. Instead, opportunities may exist to intervene at any point in the value chain or within the value web due to specialised expertise, knowledge or contacts allowing the business to become a critical or key part of the value creation process.

PORTER’S FIVE FORCES MODEL In determining how to achieve a competitive advantage, Porter suggests to start with an overall strategy. Porter’s five forces model of industry analysis has been widely used and Figure 9.4 illustrates its use.25 The five forces analysis is designed to help companies understand how profitable an industry is and also what they can do to mitigate negative forces and thereby improve profitability. FIGURE 9.4 APPLYING A FIVE FORCES INDUSTRY ANALYSIS

What is the nature of competition in the industry?

Who are the major suppliers and can they exert control on the business?

What firms could be possible new competitors? How difficult is it to enter the industry?

Who are the major customers and can they exert control on the business?

Target business for analysis

Can customers substitute or do without the products/services of the business?

According to Porter, the five forces determine the competitive environment of an industry: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and rivalry among the existing competitors. The combined power of these five forces has a decisive effect on the success of an organisation. These forces influence prices, costs and required investment of the competitors in an industry. Using this model, entrepreneurs can assess an entire industry structure.

APPLYING A FIVE FORCES ANALYSIS TO AN OPPORTUNITY ASSESSMENT The Five Forces analysis can be used systematically to assist in assessing an opportunity and Figure 9.4 illustrates the main questions that drive the analysis. First, identify who the firm’s competitive rivals are, define their market profile (size, products and services, customer base, market reach etc.) and characterise their competitive advantages and competitive behaviours. The less threatening, destructive or powerful the competitive environment is for a new business, the more attractive is the opportunity. Second, consider suppliers to the business venture; who are the key suppliers and is the business bound to one or very few supplier choices? Will it be easy to switch between suppliers or are some specific suppliers critical to business success? To what extent can any supplier control the major

Chapter 9: The assessment of entrepreneurial opportunities 303

proportion of cost of the business’ products and/or services? The higher the level of power and control suppliers may have over a new venture, the less attractive is the opportunity. Third, while customers are imperative to business survival, they can also hold a business to ransom and force unfavourable trading terms relating to price or other higher than acceptable expectations. Identify the major customers for the business and examine how reliant the business may be on one or very few customers. How sensitive are customers to changes in prices? How easy is it for customers to move to alternate producers, produce the product/service themselves or readily acquire a competitor business? As a supplier to customers, your business is in the best position if it has the upper hand. By contrast, the more power and influence the customer has over the business venture, the less attractive is the opportunity. Fourth, once your business is established in an industry it is ideal to keep others out. Therefore, you need to consider what barriers to entry exist that will make it difficult for new players to become established. First identify who the potential entrants might be. Consider related products and services or industries where the capabilities that underpin your business may be readily available to others. Do you have the means to raise or erect barriers for others to negotiate and what factors may change that could make it easy or attractive for others to enter? What would be the impact of new players and when, or under what conditions, might this event occur? The higher the cost or risks to others to enter the industry and compete with your business, the more attractive is the opportunity. Fifth, just because you sell a product and/or service, it doesn’t mean that customers have to buy. While this may seem like a truism, often this point is overlooked. Customers may have choices from one extreme, to do without, or at the other, to replace or substitute an alternate means to address the problem the product/service is meant to solve. For instance, if you want to get to town from home, you could walk, catch a bus, hire a cab, catch a train, buy a car or hitch a lift. Each of the alternatives is a different solution to the same scenario. If you sell cars or operate a taxi service, a customer choosing public transport, walking or riding a bike will influence the number of buyers in the market. The less alternatives available to the customer, the more they will be focused on your products and services and the more attractive is the opportunity. At the conclusion of your assessment of each of these five forces, review the overall attractiveness of the opportunity. Do you have strategies for dealing with the weaknesses this analysis may expose, or can you reconfigure the venture to avoid the possible threats? Is the opportunity highly attractive? Do you have sufficient strengths among the new venture team to enact a plan that can capitalise on the opportunity, and fend off possible manoeuvres by those that may influence your competitiveness?

BARRIERS TO ENTRY ANALYSIS An additional feasibility tool is the analysis of barriers to entry. These barriers may include proprietary technology (expensive to access), access to distribution channels (limited or closed to newcomers), access to raw materials and other inputs (for example, skilled labour), cost disadvantages due to lack of experience (magnified with the technological and competitive uncertainties), or risk (which raises the effective opportunity cost of capital). Table 9.1 provides a useful guide to assessing potential barriers to entry and considering strategies. Some barriers will decline or disappear as the industry develops. However, it is still important for entrepreneurs to deal with each of them in their preparation.

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TABLE 9.1

BARRIERS TO ENTRY ANALYSIS AND STRATEGIES

BARRIER

EXPLANATION

POTENTIAL STRATEGY

Unable to gain scale advantage

Market incumbents/competitors often have reached a size that enables bulk purchasing and production or service techniques that lower costs. As a new entrant your firm will need to scale up quickly and, therefore, face competitor defensive reactions, and increase the capital risks of the start-up.

Start small as a niche provider and out-compete on service to justify higher costs.

Cannot differentiate product

Long term incumbents in a market often have gained a level of customer loyalty, respect and reputation. A start-up faces the prospect of winning over customers in circumstances of direct competition, which increases customer acquisition and servicing costs.

Start-ups are advised to find an uncontested market space that will not attract competitor reaction, but make customers easier to win.

Capital requirements are too great

In some markets the expenses for capital equipment, infrastructure costs, research and development, advertising and/or customer acquisition costs can present a high start-up capital requirement unobtainable by those who are under-resourced, or insufficiently networked with wealthy supporters.

A strategy can be to use outsourcing as a means to lower costs and utilise service providers that already have established infrastructure.

Too easy for buyers to switch

In some markets competitors are plentiful and the cost of switching between suppliers is negligible. It may be extremely difficult to build customer loyalty and the costs of customer acquisition and retention may outweigh the attractiveness of the market entry.

Build in lock-in mechanisms among customers that may range from developing an uneasily replicated, deep and intimate understanding of the customer, through to creating unique componentry, services or business models that competitors are unable to duplicate.

Cannot access the sales or distribution channel

In some markets either the sales or distribution channels may be owned or locked up by competitors, meaning customer acquisition costs sky-rocket or moving the product to market is barred.

Analyse the supply chain to seek alternate paths to market; create new partnerships with differentiated competitors or other suppliers; acquire or build an alternate distribution or sales channel.

Non scale-based cost disadvantages

Cost advantages of a competitor may be derived from the learning or experience curve, proprietary technology, specific access to raw materials, preferred locations or government subsidies.

Assess your competitors and their sources of competitive advantage carefully to construct a differentiated market positioning strategy.

Government policy

Market access may be impaired by such factors as licensing requirements, quotas applied to raw materials or other regulatory hurdles that competitors have already achieved or locked up.

Seek to buy out competitors where feasible to access licenses or allocated rights; lobby government for change if a case can be reasonably argued.

Infrastructure not yet established

This may be a problem with emerging industries, for example, the electric vehicle requiring a network of rapid charging stations. If the infrastructure is not available it inhibits market entry and sustainability with customers recognising the inability to service the purchase.

Seek alternate ways to alleviate infrastructure issues (for instance a swap-and-go system for battery replacement for the electric vehicle) or assume the first mover advantage with the provision of the infrastructure; seek partnerships through nonthreatening relationships.

Lack of credibility with financial sector

A major issue for any start-up without access to major financial resources is overcoming the uncertainty of the market entry with the financing community. A lack of credibility, reputation and business history makes financing a new business difficult.

Start small with targeted steps to establish a track record; use bootstrapping techniques; seek a partner.

Source: Adapted from ‘Barriers to entry: factors preventing startups from entering a market’, MaRS Discovery District, ª 2013; ‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’ by Michael E. Porter, The Free Press, ª 1980, 1998.

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COMPETITOR ANALYSIS There is nothing more important than a thorough analysis of your competition.26 This competitor analysis involves consideration of the number of competitors as well as the strength of each. Figure 9.5 provides an illustrative grid that can be used to analyse the competition. Instructions Place an X to denote any competitive factor that a competitor has or can provide/perform better than you. Write your analysis using your X’s as an outline. Competitive Firms Competitive Factor

Company A

Company B

Company C

Your Company

Product uniqueness Relative product quality Price Service Availability/convenience Reputation/image Location Advertising and promotional policies/ effectiveness Product design Calibre of personnel Raw material cost Financial condition Production capability R&D position Variety/selection

Figure 9.6 illustrates the components of a competitor analysis from the standpoint of: 1 what drives the competition, and 2 what the competition can do. The competition’s current strategy and future goals will help dictate its response. So too, will the assumptions that each competitor has about itself as well as its perceived strengths and weaknesses. Competitors will be discussed a little more in Chapter 10.

FIGURE 9.5 COMPETITOR ANALYSIS

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FIGURE 9.6 COMPONENTS OF A COMPETITOR ANALYSIS

Analyse… Competitor’s history • Growth • Past strategic actions • Propensity to innovate Competitor’s current position • • • • • •

Brand image and positioning Objectives and commitment Current strategic direction Organisational culture Relative cost structure Capability strengths and weaknesses

Competitor’s future position

Formulate competitor profile • Is the competitor vulnerable as a company or in a category or segment? • Is there any pressure on the competitor to change strategy? • What are likely strategic shifts? • What are likely or possible defensive strategies? • What competitor reaction would harm your company the most?

• Industry/market trends • Exit barriers • Perceived strategic shifts

Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, 1985; 1998: 6. Copyright ª 1985, 1998 by Michael E. Porter; Aaker, David A., 2001, ‘Competitor analysis’, in Aaker, David A., Strategic market management, 6th ed., Wiley, Hoboken, NJ, pp. 56–75.

PROFILE ANALYSIS A single strategic variable seldom shapes the ultimate success or failure of a new venture. In most situations, a combination of variables influences the outcome. Therefore, it is important to identify and investigate these variables before the new idea is put into practice. The results of such a profile analysis enable the entrepreneur to judge the business’s potential. Until now, we have been considering external factors found in the opportunity landscape but internal factors are equally important, if not more so. The internal profile analysis (one of the exercises at the end of this chapter) is one method of determining the resources available to a new venture. This checklist approach allows entrepreneurs to identify major strengths and weaknesses in the financial, marketing, organisational and human resource factors needed for the venture to progress successfully. In this manner, entrepreneurs can prepare for possible weaknesses that may inhibit the growth of their venture. More importantly, many of the pitfalls cited earlier in this chapter can be avoided through a careful profile analysis.

AN ENTREPRENEURIAL OPPORTUNITY OR AN OPPORTUNITY FOR LIFE?

ENTREPRENEURIAL EDGE

Adelaide Tweet interviewed Jindou Lee, a former Adelaide, South Australia resident, now a successful Silicon Valley entrepreneur. Jindou is the co-founder of Happy Inspector, a tech startup developing iPad apps for property managers. They take traditional pen and paper inspections and make them digital on tablet devices. He’s also the previous co-founder of the mobile app development outfit Mighty Kingdom. Jindou leads a team of talented staff to develop mobile and digitally driven businesses. He brings a unique mix of talents integrating technological solutions with a business minded, entrepreneurial background. For over 11 years, Jindou has been a leader in digital strategy, online consulting and new business ventures. cont.

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Chapter 9: The assessment of entrepreneurial opportunities 307

cont.

Adelaide Tweet: How did you get the confidence to start in business? Jindou Lee: I think there are two emotional drivers for any decision. 1) To avoid pain or 2) To seek pleasure. Getting into business stemmed from both. My first job working for a local web development agency was the catalyst of my ‘WHY.’ It was the worst experience I have ever had. Working for people who do not respect you and bully others made me very angry and bitter. It brought me to a very dark place in my life but it let me question a lot of things about life. It made me understand that there is a right way and a wrong way to run a company. My other job working at Ratbag Games gave me another perspective. . . I worked with people who gave me confidence to grow and express myself – it was tough but fair. Those experiences helped to shape why I went into business. I wanted to shape my own destiny and run a business the way I thought it should be done. Of course there is the usual ‘I can make more money/better decisions than my current situation’ stuff as well. Adelaide Tweet: Why is entrepreneurship right for you? Jindou Lee: I’m not sure if it’s ‘right’. But if I had to summarise, I’d say it’s something that challenges me, pushes me and lets me grow every day. In turn, I get to work with my team to push them, support them and challenge them to become better people. We get to change/improve the lives of our customers – we get ‘thank you’ letters all the time. Imagine if you went to work and did something you like, then at 9 am every day, you get an email saying how happy a customer was and how our product has improved their life. That’s almost as rewarding as being a doctor! Adelaide Tweet: To succeed, who do you need to avoid and what personality traits do you need or need to work on? Jindou Lee: You need to work on yourself ALL the time. Always be humble, listen to others, discern what is right and wrong, then improve. First work on your mind, and then your emotions. There is a lot of internal dialogue that happens, and if you are not strong and positive, it gets to you. You end up making bad decisions, form bad relationships and then . . . karma catches up! Surround yourself with people who inspire you and keep you going. This may mean moving away from old friends, parents, a home, city, etc. For traits, you need to have balance. You need to [be] passionate yet detached, stubborn yet flexible, crazy yet logical (I think this needs its own book!) Some things that annoy me are when I hear people saying ‘you are your own boss? That’s awesome cos you can do whatever you want!’ This is plain ignorance. Don’t confuse entrepreneurship with laziness. If you want to be lazy, go on the dole. Adelaide Tweet: Why is entrepreneurship important? Jindou Lee: It’s important because it’s about constant improvement. Improvement of society, of people and of a process. It’s basic human instinct to be in constant evolution and in an ongoing state of finding oneself. Let me clarify that entrepreneurship is not a title, it’s a way of life. The best kind of workplace would be one that allows employees the liberty to be entrepreneurial in every aspect of their job. If we can achieve that, then that means people don’t need to be ‘your own boss’ to be an entrepreneur. And that is what we are trying to build at Happy Inspector. Adelaide Tweet: What ‘successes’ have you had with Happy Inspector? Jindou Lee: The biggest success is when we have new customers use Happy Inspector. This is the validation that it’s a worthwhile journey. I also get to see my team grow as people, get smarter and enjoy their work and life. That gives me immense pleasure. Other highlights include being accepted in Startmate’s class of 2012, being part of the previous batch and portfolio company of Dave McClure’s 500 Startups, being a finalist at Australia’s premiere tech event Tech 23 ’12 and selected as the ‘New kids on the block’ at Inman’s Real Estate Connect 2012. Extracted from an ‘How to Start-up in Adelaide, and End Up in Silicon Valley’ by Orren Prunckun, An interview with Jindou Lee, Adelaidetweet.com, 2013. For the full version go to http://adelaidetweet.com/blog/how-to-start-up-in-adelaide-and-end-up-in-silicon-valley

FEASIBILITY CRITERIA ANALYSIS Another method, the feasibility criteria analysis, was developed as a criteria selection list from which entrepreneurs can gain insights into the viability of their venture; this approach is based on answering the following questions: • Is it proprietary? The product does not have to be patented, but it should be sufficiently proprietary to permit a long head start against competitors and a period of extraordinary profits early in the venture to offset start-up costs.

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• Are the initial production costs realistic? Most estimates are too low. A careful, detailed analysis should be made so no large, unexpected expenses arise. • Are the initial marketing costs realistic? This answer requires the venture to identify target markets, market channels and promotional strategy. • Does the product have potential for very high margins? This is almost a necessity for a fledgling company. Gross margins are one thing the financial community understands. Without them, funding can be difficult. • Is the time required to get to market and to reach the break-even point realistic? In most cases, the faster the better. In all cases, the venture plan will be tied to this answer and an error here can spell trouble later on. • Is the potential market large? In determining the potential market, entrepreneurs must look three to five years into the future because some markets take this long to emerge. The mobile telephone, for example, had an annual demand of approximately 400 000 units in 1982. However, by the late 1990s this market was estimated to be growing by at least 45 per cent annually. By the end of 2014, factory shipments of mobile phones globally reached 460 million units in Quarter 3 alone. Markets with growth potential suggest prime opportunities. • Is the product the first of a growing family? If it is, the venture is more attractive to investors. If they do not realise a large return on the first product, they might on the second, third or fourth. • Do initial customers exist? It is certainly impressive to financial backers when a venture can list its first 10 customers by name. This pent-up demand also means the first quarter’s results are likely to be good and the focus of attention can be directed to later quarters. • Are the development costs and calendar times realistic? Preferably, they are zero. A ready-togo product gives the venture a big advantage over competitors. If costs exist, they should be complete, detailed and tied to a month-by-month schedule. • Is this a growing industry? This is not absolutely essential if the profits and company growth are there, but it means less room for mistakes. In a growing industry, good companies do even better. • Can the product – and the need for it – be understood by the financial community? If the financiers can grasp the concept and its value, the chances for funding will increase. For example, a portable heart-monitoring system for post-coronary monitoring is a product many will understand. Undoubtedly, some of those hearing the presentation will have already had coronaries or heart problems of some sort.27 The criteria selection approach provides a means of analysing the internal strengths and weaknesses that exist in a new venture by focusing on the marketing and industry potential critical to assessment. If the new venture meets fewer than six of these acceptance criteria questions, it typically lacks feasibility for funding. If the new venture meets seven or more of the acceptance criteria, it may stand a good chance of being funded.

COMPREHENSIVE FEASIBILITY APPROACH On CourseMate Express read about the famous ‘stage-gate’ innovation process.

The most advanced and systematic feasibility analysis, the comprehensive feasibility analysis, incorporates external factors in addition to those in the feasibility criteria analysis questions. Figure 9.7 presents a breakdown of the factors involved in a comprehensive feasibility study of a new venture – technical, market, financial, organisational and competitive. Table 9.2 identifies the specific activities

Chapter 9: The assessment of entrepreneurial opportunities 309

involved in each feasibility area and provides the key fundamentals of a comprehensive feasibility analysis approach. Although all five of the areas presented in Figure 9.7 are important, two merit special attention: technical and market (see Appendix 9A at the end of this chapter for a complete Feasibility Plan Outline). Technical – feasibility analysis of product or service Market – determination of market opportunities and risks New venture idea

Financial – analysis of financial feasibility and resources

Determination of feasibility of planned new venture

FIGURE 9.7 THE KEY FUNDAMENTALS FOR ASSESSING THE FEASIBILITY OF A NEW VENTURE

Organisational – analysis of organisational capabilities and personnel requirements Competitive – analysis of the competition

TABLE 9.2

SPECIFIC ACTIVITIES OF FEASIBILITY ANALYSES

TECHNICAL FEASIBILITY ANALYSIS

MARKET FEASIBILITY ANALYSIS

FINANCIAL FEASIBILITY ANALYSIS

ANALYSIS OF ORGANISATIONAL CAPABILITIES

COMPETITIVE ANALYSIS

•

• •

•

•

•

• • • • • • • • • • • • • • • • • • •

Crucial technical specifications Design Durability Reliability Product safety Standardisation Engineering requirements Machines Tools Instruments Work flow Product development Blueprints Models Prototypes Product testing Lab testing Field testing Plant location Desirable characteristics of plant site (proximity to suppliers, customers), environmental regulations

• • • • • • • • •

Market potential Identification of potential customers and their dominant characteristics (e.g. age, income level, buying habits) Potential market share (as affected by competitive situation) Potential sales volume Sales price projections Market testing Selection of test Actual market test Analysis of market Marketing planning issues Preferred channels of distribution, impact of promotional efforts, required distribution points (warehouses), packaging considerations, price differentiation

• • • • • • • • • • • • •

Required financial resources for: Fixed assets Current assets Necessary working capital Available financial resources Required borrowing Potential sources for funds Cost of borrowing Repayment conditions Operation cost analysis Fixed costs Variable costs Projected cash flow Projected profitability

•

• • •

• •

Personnel requirements Required skill levels and other personal characteristics of potential employees Managerial requirements Determination of individual responsibilities Determination of required organisational relationships Potential organisational development Competitive analysis

• •

•

Existing competitors Size, financial resources, market entrenchment Potential reaction of competitors to newcomer by means of price cutting, aggressive advertising, introduction of new products and other actions Potential new competitors

Source: Hans Schollhammer & Arthur H. Kuriloff, Entrepreneurship and Small Business Management, New York: John Wiley & Sons, 1979: 56. Copyright ª 1979 by John Wiley & Sons, Inc. Reprinted by permission of John Wiley & Sons, Inc.

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Technical feasibility On CourseMate Express learn how to use ‘critical questions analysis’ to test feasibility and evaluate an idea.

The evaluation of a new venture idea should start with identifying the technical feasibility. This analysis includes an assessment of the technical requirements for producing a product or service that will satisfy the expectations of potential customers. The most important of these are: • functional design of the product and attractiveness in appearance • flexibility, permitting ready modification of the external features of the product to meet customer demands or technological and competitive changes • durability of the materials from which the product is made • reliability, ensuring performance as expected under normal operating conditions • product safety, posing no potential dangers under normal operating conditions • reasonable utility – an acceptable rate of obsolescence • ease and low cost of maintenance • standardisation through elimination of unnecessary variety among potentially interchangeable parts • ease of processing or manufacture • ease in handling and use.28 The results of this investigation provide a basis for deciding whether a new venture is feasible from a technical viewpoint.

Marketability analysis How can you reduce the risk of failure? On CourseMate Express read about how to use ‘financial failure analysis’ with these important ratios.

Assembling and analysing relevant information about the marketability of a new venture are vital for judging its potential success. Three major areas in this type of analysis are: (1) investigating the full market potential and identifying customers (or users) for the goods or service, (2) analysing the extent to which the enterprise might exploit this potential market and (3) using market analysis to determine the opportunities and risks associated with the venture. To address these areas, a variety of informational sources must be found and used. For a market feasibility analysis, general sources would include: • general economic trends – various economic indicators such as new orders, housing starts, inventories and consumer spending • market data – customers, customer demand patterns (for example, seasonal variations in demand, governmental regulations affecting demand) • pricing data – range of prices for the same, complementary and substitute products; base prices; and discount structures • competitive data – major competitors and their competitive strength. More attention is given to marketing issues in Chapter 10. At this point, it is important to note the value of marketing research in the overall assessment and evaluation of a new venture.29 Therefore, as demonstrated earlier in Table 9.2, the comprehensive feasibility analysis approach is closely related to the preparation of a thorough business plan (covered in detail in Chapter 16). The approach clearly illustrates the need to evaluate each segment of the venture before initiating the business or presenting it to capital sources. Another approach to assessment was developed by Australian Professor Kevin Hindle with Canadian and European colleagues to systematically evaluate and visualise opportunities. (You can complete this assessment with the ‘Hindle’s scorecard’ exercise on page 318.) Figure 9.8 is Hindle’s ‘Positioning Analysis’, a way to measure viability on the X-axis of a venture’s ability to generate revenue and profit. Durability (Y-axis) measures the venture’s ability to sustain itself over time.

Chapter 9: The assessment of entrepreneurial opportunities 311

Credibility (size of circle) measures the ability of the venture’s founders and management team to exploit the opportunity. Hindle’s Positioning Model comprises seven kinds of ventures.30 1 Dead end: Ventures of this type have a low chance of successfully entering the market (making a sale), and sustaining their position in the industry (among competitors). 2 Hobby: Usually is subsidised by personal income and endures only with outside financial support. 3 Project: Solves a narrowly defined problem. Many scientific inventions fall into this category. 4 Job: Provides a salary but cannot scale up. Does not create wealth for others. 5 Lifestyle venture: May not create wealth beyond initial shareholders. 6 High potential: Offers innovative products well aligned with customer needs but must innovate constantly in order to keep ahead of competitors. 7 Ideal venture: Has market acceptance, potential for sustainable growth and defendable market share. Ecotourism resort

90%

Ideal Venture

80%

Religious bookstore

70%

Durability

60%

High Potential

Hobby

Job

Lifestyle Venture Project

50% 40%

Gourmet chocolate

30%

SkypeTM 20% 10%

Dead End

Fad Pet clothing shop

10%

20%

30%

40% 50% Viability

60%

70%

80%

90%

THE EMERGENCE OF ENTREPRENEURIAL ECOSYSTEMS According to Isenberg, entrepreneurs are most successful when they have access to the human, financial and professional resources they need, and operate in an environment in which policies encourage and safeguard entrepreneurs. This network is described as the ‘entrepreneurship ecosystem’.31 The idea of an entrepreneurial ecosystem is not particularly new32 although it has been described in alternative terms. For instance, an Australian report at the turn of the last century described a ‘regional milieu’ as representing ‘an area big enough to embrace a wide range of the essential ingredients required to generate competitive economic development, including being a national launch pad for distinctiveness in the global economy for its enterprises and institutions’.33 This systems view of entrepreneurship acknowledges that entrepreneurship does not start and stop with the actions of an entrepreneur or the organisations they build but instead it includes the

FIGURE 9.8 POSITIONING ANALYSIS

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multiple elements that work together to create a supportive environment for entrepreneurship.34 Considered another way, the opportunity landscape is supported by an entrepreneurial ecosystem. As it relates to universities, this has been dubbed the ‘university-based entrepreneurship ecosystem’ (U-BEE).35 (See also ‘Is your university entrepreneurial?’ on pages 25–26.) U-BEE refers to the elements of a particular university that facilitate or block a person from developing his or her enterprising personality and launching a successful social or business venture. The stakeholders of this ecosystem are any entity that has an interest, actually or potentially, in universities being more supportive of entrepreneurship. These may include government, schools, private sector, family businesses, investors, banks, entrepreneurs, social leaders, research centres, military, labour representatives, students, lawyers, cooperatives, councils, multinationals, private foundations, aid agencies and the like. The entrepreneurial ecosystem is comprised of the physical spaces where entrepreneurs interact; the alignment of institutional objectives; access to university resources like laboratories, researchers and knowledge transfer; market-driven orientation for research; participation of the business community; participation of venture capital firms; and active participation of state and federal government in creating the necessary legal framework and assigning economic resources to job and new venture creation. Governments are beginning to appreciate the positive or negative effects they can have on the institutional settings that support the development of entrepreneurship. In line with this the elements of an entrepreneurial ecosystem have been classified into six main categories: a conducive culture; enabling policies and leadership; availability of appropriate finance; quality human capital; venture friendly markets for products and services; and a range of institutional and infrastructure support.36 Institutions such as universities, government and research agencies, financing bodies and industry associations are increasingly being recognised as important to entrepreneurial success37 and, of course, these institutions and how they function differ from place to place and can change from time to time. As this point suggests, ecosystems are not static; and the Entrepreneurship in Practice ‘Entrepreneurial ecosystems do matter’ describes the changes that are occurring in Australia’s entrepreneurial ecosystem. The entrepreneurial ecosystem is something to take into account when assessing opportunities. For instance, over the past couple of decades many technology entrepreneurs from around the globe have made their way to Silicon Valley in the USA. The Valley, as it is colloquially referred to, has a long history of technology start-ups and is home to some of the most iconic Western technology corporations such as Cisco Systems, Intel, Google, Apple and Facebook. In this environment entrepreneurs find an abundance of experience to draw upon, a more willing and open capital market for technology ideas, stronger bonds between industry and universities and a culture that wonders what’s wrong with you if you’re not starting a company rather than wondering why you would bother. Bringing your venture to life in a place that provides strong support from early venture conception will improve your chance of success as the supporting infrastructure will be more immediately at hand to assist in decisions at critical times of formation, survival, growth and even later (all being well) at exit. It is worthwhile taking the elements of the entrepreneurial ecosystem shown in Figure 9.9 into account as you consider your start-up and its future trajectory.

Chapter 9: The assessment of entrepreneurial opportunities 313

FIGURE 9.9

THE ENTREPRENEURIAL ECOSYSTEM

Policy

Human capital

Culture

Support programs

Entrepreneurial process

People

Nascent entrepreneurs

Start-up

Finance

Markets

New venture Survival

Growth

Exit

Role models

Supportive entrepreneurship infrastructure (social and professional)

ENTREPRENEURIAL ECOSYSTEMS DO MATTER Just as Jindou Lee did (see the earlier Entrepreneurial Edge ‘An entrepreneurial opportunity or ENTREPRENEURSHIP an opportunity for life?’), Kerrie O’Callaghan and the team of Curicon departed Australia for Silicon Valley, USA. Kerrie says: ‘Yes, just as those before us left, we [left] too. Australia is our home, we love it [there] and we will return one day. Until then, however, we must call California IN PRACTICE home. Unfortunately, Australia does not lend itself to the needs of the start-up. Investors prefer resources; our IT industry and university system have not developed the lust for risk, innovation and passion that lives in the Valley.’ Matt Byrne, CEO of Curicon explains the culture of the Valley: ‘Everyone is trying to explore opportunities, create the next Google and above all, build great businesses. Sure, you’ve heard the over-the-top hype that comes from some of the US tech media, but what I can tell you is that when you’re there, it’s a lot like that. If you’re with the right people, it isn’t hype, it isn’t rubbish – it’s just how it is – the magic is there. ‘Building a tech business in Australia is difficult, no matter how traditional or market-proven your business is. In Silicon Valley, it is much easier. More people will help you and you have more opportunities. If someone tells you otherwise, they either haven’t been there, or they are lying to you.’ Yes, there is no doubt that ecosystems matter but Silicon Valley is not the only ecosystem that creates the conditions for entrepreneurship to thrive. Evan Thornley, an Australian and co-founder of LookSmart describes Israel, with a smaller population than Australia, as a better place for entrepreneurship than the Valley. He says: ‘The Israelis have put 120 high-tech companies on the Nasdaq in the same time we’ve [Australia] put four and they have one third our population’. The suggestion is that entrepreneurs need to look for and locate in the right environment but an alternative idea is that the right environment needs to spring up around the entrepreneurs that are going places. And this is exactly what is happening in Australia’s entrepreneurial ecosystem today.

cont.

»

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According to Australia’s BRW reporters Nassim Khadem and Caitlin Fitzsimmons, ‘Australians are now in the Valley in such numbers that they are able to pave the way for others – whether that be through mentoring, introductions to wellknown US venture capital funds and investors or simply giving another Aussie an office space to work in’. The claim is that statistics from the Australian Bureau of Statistics reveal more Australians returning home than leaving in the past decade. Around 850 000 Australians headed overseas for a short stay of at least one year, while significantly more at 1.1 million have come back between October 2003 and September 2013. When returning Australian entrepreneurs come home they also bring knowledge, expertise and connections that fuel a vibrant start-up ecosystem. Patrick Llewellyn, a San Francisco-based chief executive of online graphic design marketplace, 99designs, further explains that the co-founder Mark Harbottle remained in Australia actively involved in building and investing in local start-up businesses; the point being that the ecosystem in effect stretched between Australia and the US. Increasingly Australian tech start-ups are able to find angel investors in Australia. Some are also able to secure later stage funding. For instance Australians, Sam Chandler from Tasmania and SEEK co-founder Andrew Bassat, have backed the software company Nitro while other start-ups and young businesses, such as Atlassian and 99designs, have secured funding through US connections. Today entrepreneurial ecosystems reach globally and both the entrepreneurs and the entrepreneurial ecosystems are growing up in ways that may not conform to a perceived universal ideal, such as Silicon Valley, but instead in ways that suit the local conditions. With the right impetus ecosystems respond to entrepreneurial opportunities in the same way as entrepreneurs. It may just take a little longer. Source: Adapted from Kerrie O’Callaghan (2012), The road to Silicon Valley: Why tech start-up Curicon is leaving Australia to chase the dream (10 July), http://www.smh.com.au/technology/technology-news/the-road-to-silicon-valley-why-tech-startup-curicon-is-leaving-australia-tochase-the-dream-20120710-21qxl.html, accessed 9 September 2014; Matt Byrne (2012), The Valley: My journey to the centre of the start-up universe (22 August), http://www.smh.com.au/technology/the-valley-my-journey-to-the-centre-of-the-startup-universe-2012082224lkd.html, accessed 9 September 2014; Nassim Khadem & Caitlin Fitzsimmons (2013), ‘Aussie mafia’: The Australian entrepreneurs bringing home the Silicon Valley dream (21 November, updated 22 January 2014), http://www.brw.com.au/p/tech-gadgets/ aussie_mafia_dream_australian_entrepreneurs_eFddW1JM5fKhNQxyytQFUP, accessed 9 September 2014. Published by Fairfax Media, ª 2013.

SOURCES OF DATA FOR ASSESSING ENTREPRENEURIAL OPPORTUNITIES Global entrepreneurs supplement their information with selected sources of data. Visit the website for selected links to Internet resources that are useful in assessing entrepreneurial opportunities. Go online to find selected sources of data for startup entrepreneurs

Chapter 9: The assessment of entrepreneurial opportunities 315

SUMMARY This chapter reviewed tried and tested ways to assess the profit potential of a new business idea. Both high growth and lifestyle entrepreneurs must make decisions about the feasibility and commercial value of new ventures. The complexity of factors involved in new-venture start-up makes it difficult to clearly assess and evaluate each one. In addition, the difficulty of obtaining reliable data on failed companies adds to this dilemma. Opportunity assessment means determining whether an idea has commercialisable value. There are a number of methods for assessing whether a mere idea can become a viable opportunity. In the age of the Internet, opportunity assessment may have an entirely different character. With Internet opportunities we are more interested in finding ‘millions of markets of dozens’ rather than ‘dozens of markets of millions’. A number of pitfalls may occur in the selection of a new venture: lack of an objective evaluation of the venture, lack of insight into the market, inadequate understanding of technical requirements, poor financial understanding, lack of venture uniqueness, failure to be aware of legal issues and limited insight into the industry structure. Assessment is more rigorous than evaluation. When assessing a new venture, an entrepreneur needs to consider several critical factors: the uniqueness of the good or service, the amount of capital investment required to start the venture, the growth of sales, and the availability of the customer and of the product. Some major reasons new ventures fail are inadequate knowledge of the market, faulty product performance, ineffective marketing and sales effort, inadequate awareness of competitive pressures, rapid product obsolescence, poor timing and undercapitalisation. The opportunity assessment process leads the entrepreneur through a series of critical decision points. The feasibility of the entrepreneur’s product or service can be assessed by asking the right questions, by making a profile analysis of the venture and by carrying out a comprehensive feasibility study. Michael Porter’s work on industry structure, competition and strategy provides the basis for entrepreneurs to grasp what is needed in doing a competitive analysis of the industry. The entrepreneurial ecosystem was described with particular reference to the elements of the ecosystem that support the entrepreneurial process. Review key terms with interactive flashcards

KEY TERMS AND CONCEPTS barriers to entry commercialisation competitor analysis comprehensive feasibility analysis critical factors customer availability entrepreneurial ecosystem

entrepreneurial opportunity feasibility criteria analysis five forces model high-growth venture industrial metabolism industry environment lifestyle venture market niche

marketability opportunity landscape product availability profile analysis strategic uncertainty technical feasibility technological uncertainty uniqueness

REVIEW AND DISCUSSION QUESTIONS 1

2 3 4

Why are ideas not necessarily opportunities? Explain the difference between an idea and an opportunity and how to improve your chance of spotting an idea that could be an opportunity. What are the factors that may vary to influence an individual’s decision on whether an idea is an opportunity? How do you recognise a highly profitable and viable opportunity when you see one? What are the critical factors in assessing a new venture?

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5 6 7 8 9 10 11 12 13 14 15 16

Many entrepreneurs lack objectivity and have no real insight into the market. Why are these characteristics considered pitfalls when selecting new ventures? How do you carry out an opportunity landscape analysis? What are ways to evaluate new-venture opportunities? How do you carry out an industry value chain analysis? Explain why Porter’s ‘five forces analysis’ is useful in assessing whether an idea is an opportunity. What are barriers to entry? How do they affect new-venture assessment? Explain how a feasibility criteria analysis works. Explain how a comprehensive feasibility analysis works. How could an entrepreneur use Figure 9.5 to conduct a competitive profile analysis? What would the results provide? What types of decisions could the individual make from the analysis? What are the key elements identified in Hindle’s scorecard that are critical to assessing a venture opportunity? Identify and describe four of the steps to take when making an industry assessment. What are the influencing elements in an entrepreneurial ecosystem on the entrepreneurial process?

EXPERIENCING ENTREPRENEURSHIP Design your own opportunity assessment framework After reviewing and becoming familiar with this chapter and the key concepts important for conducting an opportunity assessment, design your own card or poster that you can keep handy or somewhere prominently visible. Highlight the key criteria and develop a scoring or ranking system that suits your ambitions as an entrepreneur. Use your own opportunity assessment framework to quickly screen ideas and identify the ones that have potential and are worthy of further investigation.

EXPERIENCING ENTREPRENEURSHIP Internal profile analysis Choose any emerging company with which you are familiar. If you are not familiar with any, consult magazines such as those from the US (Entrepreneur, Forbes, Fortune and Business Week), Asia–Pacific (Australian Financial Review, Business Review Weekly, Her Business, National Business Review, Unlimited) or international magazines (Economist, Far Eastern Economic Review, Financial Times, AsiaWeek, Asian Wall Street Journal). Gather information on one company. Then complete the following internal profile analysis by placing a tick (ü) in the appropriate column. INTERNAL RESOURCE

Financial Overall performance Ability to raise capital Working capital Position Marketing Market performance

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STRONG WEAKNESS

SLIGHT WEAKNESS

NEUTRAL

SLIGHT STRENGTH

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GREAT STRENGTH

Chapter 9: The assessment of entrepreneurial opportunities 317

INTERNAL RESOURCE

STRONG WEAKNESS

SLIGHT WEAKNESS

NEUTRAL

SLIGHT STRENGTH

GREAT STRENGTH

Knowledge of markets Product Advertising and promotion Price Distribution Organisational and technical Location Production Facilities Access to suppliers Inventory control Quality control Organisational structure Rules, policies and procedures Company image Human Number of employees Relevance of skills Morale Compensation package

Based on your analysis, what three recommendations would you make to the company’s management? 1 2 3

EXPERIENCING ENTREPRENEURSHIP Hindle’s scorecard Here is a tool to carry out a systematic evaluation of business ideas. The approach looks at three elements of the business – idea assessment, concept development and implementation of the project – and computes a score.38

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ELEMENT

QUESTION

LOW

MEDIUM

HIGH

1, 2, 3

4, 5, 6

7, 8, 9

Is this really a product or process innovation?

Not new to the industry.

An incremental improvement over what exists and maintains the industry now.

Provides radical improvement over what exists and/or is disruptive to the industry.

Can the intellectual property be legally protected?

Legal protection is either unattainable or not viable.

Some legal protection is attainable (narrow scope patents, trademarks and copyright).

Strong broad patents apply to the invention.

Market

Are customers receptive? Does this solve a problem?

The problem is minor, and the currently available competitive products or product substitutes are effective (door-in-the-face).

The problem is moderately urgent, and currently available competitive products or product substitutes are somewhat effective (cold interest).

The problem is extremely urgent, and the currently available competitive products or product substitutes are inadequate (open arms).

Industry

Is the industry attractive?

Unattractive. Need a summary of the characteristic evaluated.

Neutral

Attractive

People

Does the venture’s mission fit the personal aspirations of the entrepreneur(s), their willingness to take the risks and give up control?

There are discrepancies between the venture’s mission and the entrepreneurs’ personal aspirations and their willingness to take risks and give up control.

The mission of the new venture is in line with the entrepreneurs’ personal aspirations, but it is inconsistent with their willingness to take risks and give up control.

There is alignment between the new venture’s mission, entrepreneurs’ personal aspirations and their willingness to take risks and give up control.

Is the entrepreneurial team sufficiently connected up, down and across the value chain?

The entrepreneurial team has no personal or professional ties with customers, suppliers and competitors.

The entrepreneurial team has some personal or professional ties with customers, suppliers and competitors.

The entrepreneurial team has deep-rooted personal or professional ties with customers, suppliers and competitors.

Are the gross or operating margins satisfactory given the typical industry cost structure?

Venture’s gross or operating margins are lower than typical for the industry.

Venture’s gross or operating margins are typical for the industry.

Venture’s gross or operating margins are higher than typical for the industry.

Are operating and cash cycles optimised?

Inventory is ineffective. Venture must prepay suppliers. Little control on accounts payable. Possible bad debts.

The venture has optimised some components of the cash and operating cycles.

Inventory period is shortened. Effective just in time. Or no inventory needed. No need to pay suppliers until product sells. Or customer prepays the product.

Does the venture’s revenue model entail customer repeat sales or recurring revenue?

The venture has no recurring revenue generated through repeat sales or subscriptions.

Some limited revenue generated through repeat sales and/or subscriptions.

Revenue continuously generated through customers’ repeat sales or subscriptions.

POSSIBLE SCORE

Product

Money

Total scores Maximum score on nine questions is nine points, therefore 81 points is the maximum.

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Chapter 9: The assessment of entrepreneurial opportunities 319

a

(Less than 24 points) Dead-end business: Ventures of this type have no chance of returning any money to their shareholders. These ventures have a low chance of successfully entering the market (making a sale) and sustaining their position in the industry (among competitors). b (24–34 points) Hobby business: This can be subsidised by personal income from other activities (employment, selfemployment, business or investment). Cannot endure without outside financial support. Lacks elements for reaching a viable market. Not worthy of serious investment. c (35–44 points) Likely fundable project: This venture can provide an effective point solution to a narrowly defined problem. Many scientific inventions fall into this category. Opportunity here means possible grants, favourable alliances and licence agreements to build a more complete end-customer solution. d (45–54 points) A good job for someone: Self-employed individuals and small business owners can generate income to pay themselves and some employees. Can persist over time, but is not positioned well to scale upward. Great personal choice when compared to unemployment or escape a desk job. Only big enough for one person or family; does not create wealth for others. e (55–64 points) Niche leader: ‘Big fish in a small pond’. This venture has a captive or loyal clientele in their niche markets. Can potentially keep other fish out of the pond. Scalability is the biggest challenge for new investors, since this venture may not be able to create wealth for many beyond its initial shareholders. f (65–74 points) Go into an incubator: This venture has innovative products well aligned to customer needs. Needs stamina to sustain innovation over time. Needs to learn how to stay ahead of competitors. Could position itself for an early buyout by a larger company and produce lucrative returns to its shareholders. g (75–81 points) Power house: This venture is characterised by proven market acceptance, potential for sustainable growth and a defendable market share. Viability, durability and credibility factors are well balanced. Alignment of all key elements of venture success and denotes a high probability of success.

CASE STUDIES CASE 9.1 Examining the industry Jing Wu and Yuan Zhang decided to launch a new business to produce and distribute non-carbonated, high-quality soft drinks. They decided on a location near Qingdao Lake, China, partly because they believed access to high-quality, pure water would provide them with a competitive edge. A business consultant recommended they construct a comprehensive business plan that would include a clear and thorough assessment of the beverage industry. This exercise should help them understand their challenges and help position this new product. The two partners have spent two months of their spare time (since they both work for another employer full-time) trying to gather research to validate their idea. Because their current employer is not in the beverage industry, they are struggling to find sources of information. Jing and Yuan realise that before any type of viable business plan can be developed, the beverage industry needs to be assessed. The specific elements of this type of assessment, however, are unclear to both of them. QUESTIONS

1 2 3

What elements of the industry should Jing and Yuan examine? How would the five forces model help them? Describe what potential barriers to entry they might encounter.

CASE 9.2 Nothing unique to offer During the past four months, George Vazquez has been putting together his plan for a new venture. George wants to open a pizzeria near the local university. The area has three pizza enterprises, but George is convinced that demand is sufficient to support a fourth.

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The major competitor is a large national franchise unit that – in addition to its regular food service menu of pizzas, salads, soft drinks and desserts – offers door-to-door delivery. This delivery service is very popular with the university students and has helped the franchise unit capture approximately 40 per cent of the student market. The second competitor is a ‘pizza wagon’ that carries precooked pizzas. The driver circles the university area and sells pizzas on a firstcome, first-served basis. The pizza wagon starts the evening with 50 pizzas of all varieties and sizes and usually sells 45 of them at full price. The last 5 are sold for whatever they will bring. It generally takes the wagon all evening to sell the 50 pizzas, but the profit markup is much higher than that obtained from the typical pizza sales at the franchise unit. The other competitor offers only in-house services, but it is well known for the quality of its food. George does not believe that it is possible to offer anything unique. However, he does believe that a combination of door-to-door delivery and high-quality, in-house service can help him win 15 to 20 per cent of the local market. ‘Once the customers begin to realise that ‘‘pizza is pizza’’,’ George told his partner, ‘we’ll begin to get more business. After all, if there is no difference between one pizza place and another, they might just as well eat at our place.’ Before finalising his plans, George would like to bring in one more partner. ‘You can never have too much initial capital,’ he said. ‘You never know when you’ll have unexpected expenses.’ But the individual whom George would like as a partner is reluctant to invest in the venture. ‘You really don’t have anything unique to offer the market,’ he told George. ‘You’re just another ‘‘me too’’ pizzeria, and you’re not going to survive.’ George hopes he will be able to change the potential investor’s mind, but if he is not, George believes he can find someone else. ‘I have 90 days before I intend to open the business, and that’s more than enough time to line up the third partner and get the venture under way,’ he told his wife yesterday. QUESTIONS

1 2 3

Is there any truth to the potential investor’s comment? Is the lack of uniqueness going to hurt George’s chances of success? Explain. If George were going to make his business venture unique, what steps might he take? Be complete in your answer. In addition to the uniqueness feature, what other critical factors is George overlooking? Identify and describe three, and give your recommendations for what to do about them.

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. barriers to entry marketability 1

national innovation system product availability

profile analysis

In order to grow and expand a new venture, an entrepreneur needs to win over various stakeholders. However, the expectations and behaviours of different types of stakeholders are not identical. Seek out the article by Wu, Ellram and

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2

3

Schuchard (2014), ‘Understanding the role of government and buyers in supplier energy efficiency initiatives’ published in the Journal of Supply Chain Management, 50(2), 84–105 and use their insights drawn from this case to examine your own stakeholder expectations. In this chapter we discussed Michael Porter’s five forces model which is also known as the diamond model. In the article by Eren Ozgen (2011), ‘Porter’s diamond model and opportunity recognition: A cognitive perspective’ in the Academy of Entrepreneurship Journal, 17(2), 61–76, the author discusses five ways in which this model can inform an entrepreneur about opportunities. What are they and do you agree with the author’s propositions? Why or why not? The National Innovation System (NIS) has a role to play in providing opportunities for entrepreneurs and entrepreneurial firms – the NIS is the flow of technology and information among people, enterprises and institutions that is key to the innovative process on the national level. In the article by Kavita Mehra and Kirti Joshi (August, 2010), ‘The enabling role of the public sector in innovation: A case study of drug development in India’ in Innovation: Management, Policy and Practice, 12(2), 227–37, the authors identify the role of a number of actors who contribute to the outcome of an innovative product. Review the case and discuss the implications for your own country. Does the government play a role in innovation and if so, how? If you are in India, how have the conditions changed since the article was published? What does all this mean with respect to opportunities and what should you look for when you seek to assess the quality of a new venture idea?

ENDNOTES 1 The Essays of Francis Bacon, ‘Of ceremonies and respect’, first published in 1601. Web edition published by eBooks@Adelaide, http:// ebooks.adelaide.edu.au/b/bacon/francis/ b12e/index.html. 2 Cooper, A. C. (1993). Challenges in predicting new firm performance. Journal of Business Venturing, May, 241–53; Holland, D. & Garrett, R. (2013). Entrepreneurs’ start-up versus persistence decisions: A critical evaluation of expectancy and value. International Small Business Journal, 1–22, doi: 10.1177/ 0266242613480375. 3 Kirzner, I. M. (1973). Competition and entrepreneurship. Chicago: University of Chicago Press, xx. See also Busenitz, Lowell W. Research on entrepreneurial alertness. Journal of Small Business Management, 34(4) (1996), 35–44; Tang, Jintong, K. Michele Kacmar & Lowell Busenitz. A social cognition view of alertness in the discovery process of entrepreneurial opportunities. Academy of Management Annual Meeting Proceedings, (2009), 1–6. 4 Vaghely, I. P. & Julien, A. (2010). Are opportunities recognized or constructed? An information perspective on entrepreneurial opportunity identification. Journal of Business Venturing 25, 73–86. 5 Gielnik, M. M., Kra¨mer, A., Kappel, B. & Frese M. (2014). Antecedents of business opportunity identification and innovation: Investigating the interplay between information processing and information acquisition, Applied

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Psychology: An International Review, 63(2), 344–81; Smith, B. R., Matthews, B. H. & Schenkel, M. T. (2009). Differences in entrepreneurial opportunities: The role of tacitness and codification in opportunity identification. Journal of Small Business Management, 47(1), 38–57. 6 Holland, D. V. & Garret, R. P. (2013). Entrepreneurs’ start-up versus persistence decisions: A critical evaluation of expectancy and value. International Small Business Journal, doi: 10.1177/ 0266242613480375, 1–22. 7 Gupta, V. K., Turban, D. B. & Pareek, A. (2013). Differences between men and women in opportunity evaluation as a function of gender stereotypes and stereotype activation. Entrepreneurship Theory and Practice, July, 771–88. 8 Foo, M. (2011). Emotions and entrepreneurial opportunity evaluation. Entrepreneurship Theory and Practice, March, 375–93. 9 Townsend, D. M., Busenitz, L. W. & Arthurs, J. D. (2010). To start or not to start: Outcome and ability expectations in the decision to start a new venture. Journal of Business Venturing, 25, 192–202. 10 Hall, D. (1999). In the company of heroes: An insider’s guide to entrepreneurs at work. London: Kogan Page. 11 Siegel, D. S. & Maija, R. (2012). The role of market and technological knowledge in recognizing entrepreneurial opportunities. Management Decision,

50(5), 797–816; Maija, R., C. Shrader, R. & Simon, M. Perception of entrepreneurial opportunity: A general framework. Management Decision, 50(7) (2012), 1233–51; Zietsma, C. (1999). Opportunity knocks – or does it hide? An examination of the role of opportunity recognition in entrepreneurship. Frontiers of Entrepreneurship Research. Wellesley, MA: Babson College, http:// www.babson.edu/entrep/fer/papers99/X/ X_C/X_C.html; Fletcher, D. E. (2006). Entrepreneurial processes and the social construction of opportunity. Entrepreneurship & Regional Development, 18(5), 421–40; Holt, R. (2008). Using activity theory to understand entrepreneurial opportunity. Mind, Culture & Activity, 15(1), 52–70. doi: 10.1080/10749030701800957; Shane, S. (2000). Prior knowledge and the discovery of entrepreneurial opportunities. [Article]. Organization Science, 11(4), 448–69. 12 Townsend, D. M., Busenitz, L. W. & Arthurs, J. D. (2010). To start or not to start. 13 Ramos-Rodrı´guez, A. R., MedinaGarrido, J. A., Lorenzo-Go´mez, J. D. & Ruiz-Navarro, J. (2010). What you know or who you know? The role of intellectual and social capital in opportunity recognition. International Small Business Journal, 28(6), 566–82; Kontinen, T. & Ojala, A. (2011). Network ties in the international opportunity recognition of family SMEs. International Business Review, 20(4), 440–53; Singh, R. P. (2000).

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Entrepreneurial opportunity recognition through social networks. New York: Garland Publishing; Elfring, T. & Hulsink, W. (2007). Networking by entrepreneurs: Patterns of tie-formation in emerging organizations. Organization Studies, 28(12), 1849–72. doi: 10.1177/ 0170840607078719; Evald, M. R., Klyver, K. I. M. & Svendsen, S. G. (2006). The changing importance of the strength of ties throughout the entrepreneurial process. Journal of Enterprising Culture, 14(1), 1–26; Jing, Z., Pek-Hooi, S. & Pohkam, W. (2011). Direct ties, prior knowledge, and entrepreneurial resource acquisitions in China and Singapore. International Small Business Journal, 29(2), 170. doi: 10.1177/ 0266242610391931; Sequeira, J., Mueller, S. L. & McGee, J. E. (2007). The influence of social ties and self-efficacy in forming entrepreneurial intentions and motivating nascent behavior. Journal of Developmental Entrepreneurship, 12(3), 275–93. 14 Herron, H. & Sapienza, H. J. (1992). The entrepreneur and the initiation of new venture launch activities. Entrepreneurship: Theory & Practice, 17(1), 49–55. 15 Hindle, K. (2010). Skillful dreaming: Testing a general model of entrepreneurial process with a ‘unique’ narrative of business formation. Entrepreneurial Narrative: Theory, Ethnomethodology and Reflexivity, 1, 97–136. 16 Chesbrough, H. W. (2007). Open business models: How to thrive in the new innovation landscape. Cambridge, MA: Harvard Business Press, xiii. 17 Hall, In the company of heroes. 18 Ronstadt, R. C. (1984). Entrepreneurship. Dover, MA: Lord Publishing, 74. 19 Adapted from Ronstadt, Entrepreneurship, 75. 20 Ronstadt, Entrepreneurship, 74. 21 Bhaskar Chakravorti. (2004). The new rules for bringing innovations to the market. Harvard Business Review, March, 58–67; see also Morse, E. A., Fowler, S. B. & Lawrence, T. B. (2007). The impact of virtual imbeddedness on new venture survival: Overcoming the liabilities of newness. Entrepreneurship Theory and Practice, 31(2), 139–60; and Mark Simon & Rodney C. Shrader. Entrepreneurial actions and optimistic overconfidence: The role of motivated reasoning in new product introductions. Journal of Business Venturing, 27(3) (2012), 291–309. 22 Levitt, T. (1960). Marketing myopia. Harvard Business Review, July/August, 45–56; see also Fischer, E. & Reuber, R.

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The good, the bad, and the unfamiliar: The challenges of reputation formation facing new firms. Entrepreneurship Theory and Practice, 31(1), 53–76. 23 Porter, M. E. (1991). Knowing your place – How to assess the attractiveness of your industry and your company’s position in it. Inc., September, 90. 24 Adner, R. & Kapoor, R. (2010). Value creation in innovation ecosystems: How the structure of technological interdependency affects firm performance in new technology generations. Strategic Management Journal, 31, 306–33. 25 See, for example, Porter, M. E. (1998). Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press; Porter, M. E. (1998). Competitive advantage: Creating and sustaining superior performance. New York: Free Press; Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, May/ June, 43–59. 26 For a detailed discussion of this topic, see Porter, Competitive strategy; Porter, M. E. & Millar, V. E. (1985). How information gives you competitive advantage. Harvard Business Review, July/August, 149–60; Underwood, Jim. Competitive intelligence for dummies. Hoboken, NJ, Chichester: Wiley; John Wiley distributor, 2013; Fleisher, C. S. & Bensoussan, B. E. (2007). Business and competitive analysis: effective application of new and classic methods. FT Press; Bensoussan, B. & Fleisher, C. S. (2003). Strategic and competitive analysis: methods and techniques for analyzing business competition; Gordon, I. (1989). Beat the competition: How to use competitive intelligence to develop winning business strategies. Basil Blackwell. 27 Baty, G. B. (1974). Entrepreneurship: Playing to win. Reston, VA: Reston Publishing, 33–4. 28 Schollhammer, H. & Kuriloff, A. H. (1979). Entrepreneurship and small business management. New York: John Wiley & Sons, 58; see also AtuaheneGima, K. & Li, H. (2004). Strategic decision comprehensiveness and new product development outcomes in new technology ventures. The Academy of Management Journal, 47(4), August, 583–97; Justis, R. T. & Kreigsmann, B. (1979). The feasibility study as a tool for venture analysis. Journal of Small Business Management, 17(1), 35–42; Rauch, A. & Rijsdijk, S. A. (2013). The effects of general and specific human capital on long-term growth and failure of newly founded businesses.

Entrepreneurship Theory and Practice, 37(4), 923–41. 29 Verhees, F. J. H. H. & Meulenberg, T. G. (2004). Market orientation, innovativeness, product innovation, and performance in small firms. Journal of Small Business Management, 42(2), April, 134–54; Schindehutte, M., Morris, M. H. & Kocak, A. (2008). Understanding market-driven behavior: The role of entrepreneurship. Journal of Small Business Management, 46(1), 4–26; and Hills, G. E., Hultman, C. M. & Miles, M. P. (2008). The evolution and development of entrepreneurial marketing. Journal of Small Business Management, 46(1), 99–112. 30 Hindle, K., Mainprize, B. & Mainprize, N. (2010). Venture intelligence. How smart investors and entrepreneurs evaluate new ventures. Melbourne: Learnfast Press. 31 Isenberg, D. J. (2010). How to start an entrepreneurial revolution. Harvard Business Review, 88(6), 40–50; Hwang, V. W. & Horowitt, G. (2012). The rainforest – The secret to building the next Silicon Valley. California: Regenwald. 32 See Aldrich, H. E. (1990). Using an ecological perspective to study organizational founding rates. Entrepreneurship Theory and Practice, 14(3), 7–24; Dean, T. J., Brown, R. L. & Bamford, C. E. (1998). Differences in large and small firm responses to environmental context: Strategic implications from a comparative analysis of business formations. Strategic Management Journal, 19(8), 709–28; Dollinger, M. J. & Golden, P. A. (1992). Interorganizational and collective strategies in small firms: Environmental effects and performance. Journal of Management, 18(4), 695–715; Gnyawali, D. R. & Fogel, D. S. (1994). Environments for entrepreneurship development: Key dimensions and research implications. Entrepreneurship Theory & Practice, 18(4), 43–62; Shane, S. (1996). Explaining variations in rates of entrepreneurship in the United States: 1899–1988. Journal of Management, 22(5), 747–81; Van de Ven, A. H. (1993). The development of an infrastructure for entrepreneurship. Journal of Business Venturing, 8(3), 211–30. 33 Garlick, S. (2000). Engaging universities and regions: Knowledge contributions to regional economic development in Australia. Department of Education, Training and Youth Affairs (ed.). Commonwealth of Australia, Canberra, Australia. 34 Nadgrodkiewicz, A. (2013). Building entrepreneurship ecosystems. Available at

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http://www.cipe.org/publications/detail/ building-entrepreneurship-ecosystems-0. 35 Rice, Mark P., Michael L. Fetters & Patricia G. Greene. (2014). Universitybased entrepreneurship ecosystems: A global study of six educational institutions. International Journal of Entrepreneurship & Innovation Management, 18(5), 481–501; Fetters, M. L., et al. (eds) (2010). The development of university-based entrepreneurship

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ecosystems: global practices. Studies in Higher Education. Cheltenham, UK, Edward Elgar. 36 Isenberg, D. (2010). How to start an entrepreneurial revolution. Harvard Business Review, June 2010, http:// www.frederickentrepreneurship.net/app/ download/745698/Entrepreneurialþ RevolutionþIsenberg,þ2010.pdf. 37 Alvarez, C., Urbano, D., Coduras, A. & Ruiz-Navarro, J. (2011). Environmental

conditions and entrepreneurial activity: A regional comparison in Spain. Journal of Small Business and Enterprise Development, 18(1), 120–40. 38 Hindle, K., Mainprize, B. & Mainprize, N. (2010). Venture intelligence. How smart investors and entrepreneurs evaluate new ventures. Melbourne: Learnfast Press.

324 Appendix 9A: Feasibility plan outline

APPENDIX 9A FEASIBILITY PLAN OUTLINE This outline provides the needed aspects of a complete feasibility plan. Each section has some of the key material that needs to be included. Following this outline will help the entrepreneur recognise the actual feasibility of the proposed venture as well as the areas that need to be further developed before the concept could ever be considered for potential funding.

TITLE PAGE Name of proposed company: Names and titles of the founding team members:

Relevant contact information (name, title, address, phone, email),

TABLE OF CONTENTS Make sure that all of the contents in the feasibility plan have page numbers and are listed carefully in the table of contents. I Executive summary II The business concept III Industry/market analysis IV Management team V Product/service development analysis VI Financial analysis VII Timeline VIII Bibliography

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Appendix 9a: Feasibility plan outline 325

THE SECTIONS OF A FEASIBILITY PLAN EXECUTIVE SUMMARY Explanation: Include the most important highlights from each section of the feasibility study. Be sure to include a clear and concise description of the venture, whatever proprietary aspects it may possess, the target market, the amount of financing needed and the type of financing that is being requested.

THE BUSINESS CONCEPT Explanation: Using the following directions, articulate a compelling story for why this is an excellent concept. This section allows the reader to understand what concept is being proposed and why it has true potential in the marketplace. It also provides an opportunity for the entrepreneur to prove that he or she can articulate this concept in clear and comprehensible terms to people outside their circle of friends and close associates.

KEY CONCEPTS Describe whether the proposed concept is a retail, wholesale, manufacturing or service business. Identify the current stage of development for the venture (concept stage, start-up, initial operations or expansion).

Feasibility plan template available online

Include a clear description of the targeted customer, the value proposition (in terms of benefits gained) for that customer and the potential growth opportunities.

Summarise any proprietary rights associated with this concept, whether that be patents, copyrights, licences, royalties, distribution rights or franchise agreements.

INDUSTRY/MARKET ANALYSIS Explanation: The industry/market analysis is critical. Is there a market for the product or service resulting from the venture? What are the current trends in this industry? What are the predicted trends for this industry? Can any of this be substantiated? The market for the product/service may be obvious, yet the feasibility analysis must validate its existence. In the venture feasibility analysis, it may be enough to prove that a sufficient market

Appendix

326 Appendix 9A: Feasibility plan outline

exists for the venture and that no further in-depth research is warranted. However, entrepreneurs should always study their competitors in the marketplace. Lessons learned from competitors provide opportunities for entrepreneurs to find the unique distinctions in their own concept.

KEY CONCEPTS Explain the industry that this concept focuses on, as well as whatever trends may exist in that particular industry today.

Discuss the target market analysis that has been used and what specific market niche that has produced. In addition, identify the market size, its growth potential and your plan for market penetration based on research.

Explain the customer profile in terms of who the specific customer is and – again – what value proposition (in terms of benefits) is being offered to the customer.

Finally, be sure to include a competitor analysis that describes thoroughly the competition existing today and how specifically your concept will match up or exceed the competition and why.

MANAGEMENT TEAM Explanation: Keep in mind that all new ventures must stand the scrutiny of whether the founding team can really move this idea to market. The experience of the management team may end up being one of the most critical factors to outside investors. Many times, venture capitalists have expressed their belief that they prefer a ‘B’ idea with an ‘A’ team as opposed to an ‘A’ idea with a ‘B’ team. In other words, there is a real concern about the implementation phase of a proposed concept. Does this founding team have the background, experience, skills and networks to successfully make the concept operational?

KEY CONCEPTS Identify the founding team members and the key personnel in place to guide the proposed company.

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Appendix 9a: Feasibility plan outline 327

Explain the team’s qualifications and how the critical tasks are being assigned. Also include any board of directors/advisers that are in place.

Finally, outline any ‘gaps’ in the management team (in terms of skills and abilities) and explain how those will be addressed.

PRODUCT/SERVICE DEVELOPMENT ANALYSIS Explanation: Before going any further with a conceptual idea, the entrepreneur must determine whether the concept has any practical feasibility. One of the most important questions in this section of the feasibility analysis would be: ‘What unique features distinguish your product/service?’ The more unique the features of a product or service, the better chance the business concept has of being successful.

KEY CONCEPTS Provide a detailed description of the proposed concept, including any unique features that make it distinctive.

Explain the current status of the project and include a clear timeline of the key tasks to complete.

Identify any intellectual property involved with this potential venture, and discuss the proprietary protection that exists. Any proposed or completed prototype testing should be described here as well.

Finally, identify any anticipated critical risks in terms of potential product liability, governmental regulations or raw material issues that may hinder this project at any stage.

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328 Appendix 9A: Feasibility plan outline

FINANCIAL ANALYSIS Explanation: There are three critical areas of concern when assessing an opportunity with respect to funding and financial viability. First, how much money is required to establish the venture and is it accessible? Second, will the venture have sufficient cash (or working capital) to meet all the current expenses as they fall due? Third, what volume of sales in a year will be required to ensure profitability of the venture? To answer these three questions the establishment costs need to be estimated, the cash flow will need to be forecast and a break-even sales volume analysis needs to be determined. In taking these three steps summarise the critical assumptions upon which the financial information is based; in other words, show on what basis the numbers have been derived. Later, as part of business planning, a pro forma income statement, and balance sheet will be added. Include as part of your feasibility analysis references to preliminary outside sources needed to get some idea of the generation of revenue and the cash position of the venture during the first three years. The break-even analysis will be used later to demonstrate where the venture moves from survival to growth.

KEY CONCEPTS Assumptions:

Establishment costs:

Pro forma cash-flow statement:

Break-even sales volume analysis:

TIMELINE Explanation: Use a graphic representation of the dates and the related tasks in order of their completion until actual concept launch.

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BIBLIOGRAPHY Explanation: Provide any key endnotes, footnotes, sources or extra information that would be critical for a funding source to see in relation to the work you performed in creating this feasibility study.

Appendix

» CHAPTER TEN MARKETING FOR ENTREPRENEURIAL VENTURES CHAPTER OBJECTIVES

1 We see our customers as invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better. Jeff Bezos Founder & CEO, Amazon1

To appreciate the context of entrepreneurial marketing as distinct from traditional marketing

2 To examine the entrepreneurial marketing concept – philosophy and consumer orientation 3 To establish the areas vital to a marketing plan 4 To establish the concept and need for customer segmentation

The new marketing is dynamic and happening in real time. This requires the marketer to accept that the customer is in control, and therefore drives decisions. It also requires reconceptualization of the marketing mix from the perspective of the customer: beyond customer-centric to customer-made. This generation is connected, creative, collaborative, and contextual. The customer is at the center of marketing activity. Minet Schindehutte, Michael H. Morris & Leyland F. Pitt, Rethinking Marketing2

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

5 To identify the key elements of an effective market survey 6 To outline the processes and entrepreneurial tactics in marketing research 7 To examine marketing on the Internet and the emerging use of social media and mobile marketing for entrepreneurial firms 8 To differentiate green marketing from traditional marketing practice 9 To discuss the key features of a pricing strategy and how customisation influences the perception of price by the customer

Chapter 10: Marketing for entrepreneurial ventures 331

ENTREPRENEURIAL MARKETING IS ESSENTIAL Marketing is just as critical to new businesses as it is for established ones. But for start-ups it is particularly important because the entrepreneur must stay intimately in touch with customers and with their needs. A sound entrepreneurial marketing plan provides a strong foundation for growth. Innovative ideas in marketing are critically important as marketing ideas are close to the customer and provide the strongest avenue to building profitable business performance.3 For the entrepreneur, a market is a group of individuals or companies (potential customers) who have purchasing power and unsatisfied needs.4 A new venture will survive only if there is sufficient demand for its product or service from a market5 and the business can produce the products or services with sufficient profit margin to sustain its existence (see also Chapter 15 on measuring performance). This seems obvious and yet many entrepreneurs know very little about their market and even attempt to launch new ventures without having identified a market. Table 10.1 outlines the marketing skills of great entrepreneurs. A number of techniques and strategies can assist entrepreneurs to effectively analyse a potential market. By using them, entrepreneurs can gain in-depth knowledge about the specific market, translate this knowledge into a well-formulated business plan and operationalise a business model. Effective marketing analysis can also help a new venture position itself and make changes that will result in increased sales.6 TABLE 10.1

MARKETING SKILLS OF GREAT ENTREPRENEURS

1 They possess unique environmental insight, which they use to spot opportunities that others overlook or view as problems.

7 They are meticulous about details and are always in search of new competitive advantages in quality and cost reduction, however small.

2 They develop new marketing strategies that draw on their unique insights. They view the status quo and conventional wisdom as something to be challenged.

8 They lead from the front, executing their management strategies enthusiastically and autocratically. They maintain close information control when they delegate.

3 They take risks that others, lacking their vision, consider foolish.

9 They drive themselves and their subordinates.

4 They live in fear of being pre-empted in the market.

10 They are prepared to adapt their strategies quickly and to keep adapting them until they work. They persevere long after others have given up.

5 They are fiercely competitive.

11 They have clear visions of what they want to achieve next. They can see further down the road than the average manager can see.

6 They think through the implications of any proposed strategy, screening it against their knowledge of how the marketplace functions. They identify and solve problems that others do not even recognise. Source: Peter R. Dickson, Marketing Management (Fort Worth, TX: The Dryden Press, 1994), 8. Reprinted with permission of South-Western, a division of Cengage Learning: http://permission.cengage.com/permissions

From Aussie strippers to Chinglish signs. On CourseMate Express read about Guerrilla Marketing in Asia-Pacific countries.

332 Part 3: Developing entrepreneurial ventures

ENTREPRENEURIAL MARKETING DEFINED Entrepreneurial marketing is driven by an innovative, risk-oriented and proactive orientation.7 It On CourseMate Express read about how to wage guerrilla war using inexpensive marketing. Prove tactics.

is not only a concept for small business but also of large corporations.8 A commonly cited definition of entrepreneurial marketing is ‘the proactive identification and exploitation of opportunities for acquiring and retaining profitable customers through innovative approaches to risk management, resource leveraging and value creation’. A basic premise of entrepreneurial marketing is its role in achieving durable competitive advantage through value-creating innovation.9 Traditional marketing is ‘cost driven’; entrepreneurial marketing is ‘revenue driven’. Investors care more about whether an entrepreneur can demonstrate demand and bring in the cash rather than whether the entrepreneur has a tidy business plan or a recognised label.10 Without much money to spend, the return on investment (ROI) of every advertisement, of every campaign, is that much more important. In essence, it means learning how to manage the risk of misjudgements11 in the context of uncertainty but it still requires research (discussed later in this chapter) and answering some fundamental questions. Because of a lack of resources, entrepreneurial marketing must almost necessarily rely on small sample sizes and qualitative research techniques such as interviews, media scanning or focus groups. Increasingly, entrepreneurs must be prepared to explore markets through co-creation strategies and partnership strategies with potential customers, suppliers and/or investors12 making judgements through affordable loss rather than expected return.13 The key skill is speed; that is, rapidly matching the gigantic wants of customers against the limited capabilities and solutions that the business can provide.14 Entrepreneurs typically need the broad thinking of a generalist and must be able to tolerate disorder. Furthermore, they suffer from ‘resource poverty’, what is known as liquidity constraints that often requires zero-budget marketing. This is both a problem and an opportunity. It means the entrepreneur must adopt an entirely different approach to marketing. While the principles of marketing for the entrepreneur remain the same, the context and objectives of entrepreneurial marketing differ from the traditional marketing view (see Table 10.2). The underlying principles of marketing are grounded on what is commonly referred to as the marketing mix, sometimes referred to as the four Ps: product, price, promotion and place. However, in the late 1980s to early 1990s the marketing mix evolved into a more customer-centric view to the four Cs: customer solution, customer convenience, customer communication and customer cost.15 In the current era, this has evolved further to capture a paradigm shift16 away from a time when the customer was the object of marketing to now where the customer is involved in shaping the marketing mix.17 Through active participation, the customer plays a part in co-creating the product or service and the experience they want. Customers now form communities and are integral to promotional networks. Price is determined by customer customisation and instead of having one place of purchase, the customer now has an expanded range of choices in how they will receive and pay for the product/service. The current version of the four Cs therefore has evolved to co-creation, communities, customisation and choice. But wait, there’s more! Increasingly service is attracting much more attention within the marketing mix. This has become known as the expanded servicescape18 and takes into account the physical, social, natural and socially symbolic dimensions of the customer experience. In plain language that means the people, processes, images, cultural cues or signals, the furniture and fittings, signs and anything else that leaves an impression with the customer in a service environment comes under the microscope of the marketer. For the marketer, the customer is truly king!

Chapter 10: Marketing for entrepreneurial ventures 333

TABLE 10.2

CONTRASTING CONVENTIONAL AND ENTREPRENEURIAL MARKETING TRADITIONAL MARKETING

ENTREPRENEURIAL MARKETING

Basic premise

Facilitation of transactions and market control

Sustainable competitive advantage through value-creating innovation

Orientation

Marketing as objective, dispassionate science

Central role of passion, zeal, persistence and creativity in marketing

Context

Establishes relatively stable markets

Envisioned, emerging and fragmented markets with high levels of turbulence

Marketer’s role

Marketing is a function of the corporation and the business unit Coordinator of marketing mix; builder of the brand

Internal and external change agent; creator of the category Entrepreneur is responsible for marketing as well as other functions. Everyone in the firm is a marketer

Market approach

Reactive and adaptive approach to current market situation with incremental innovation

Proactive approach, leading the customer with dynamic innovation. Opportunity recognition that is both intended and emergent is a central and unique component

Customer needs

Articulated, assured, expressed by customers through survey research

Unarticulated, discovered, identified through lead users

Risk perspective

Risk minimisation in marketing actions

Marketing as a vehicle for calculated risk taking; emphasis on finding ways to mitigate, stage or share risks

Value perspective

Traditional marketers often see the value relationship as a zero sum game driving costs down and reducing the price to the customer

Uses innovation, product, process and strategy to create new value propositions for customers

Resource management

Efficient use of existing resources, scarcity mentality Traditional marketers use financial metrics as the dominant indicator of success

Social networking and relationships with customers and other stakeholders. Leveraging, creative use of the resources of others; doing more with less; actions are not constrained by resources currently controlled

New product/service development

Marketing supports new product/service development activities of R&D and other technical departments

Marketing is the home of innovation; customer is a co-active producer

Customer’s role

External source of intelligence and feedback

Active participant in company’s marketing decision process, defining product, price, distribution and communication approaches

Source: Incorporating Morris, Michael H., Minet Schindehutte and Raymond W. LaForge, ‘Entrepreneurial marketing: A construct for integrating emerging entrepreneurship and marketing perspectives’, Journal of Marketing Theory & Practice, 10(4), Fall 2002, 1; and Hills, G. E., Hultman, C. M. & Miles, M. P. (2008), ‘The evolution and development of entrepreneurial marketing’, Journal of Small Business Management, 46(1), 99–112

For an entrepreneur building a business, responding to this customer-centric view involves marketing not only to customers but also to a multitude of stakeholders, including potential suppliers, employees, strategic partners or alliances, investors and to some extent family and the general community, in order to bring together the resources to fulfil the newly identified market needs/wants. Entrepreneurs must focus on developing the positioning of the product or service and segment the market to target particular groups of customers and to do this they may need to market to a range of stakeholders. In Chapter 9, determining the first ‘C’, customer solution and exploring co-creation, was emphasised for defining the entrepreneurial opportunity. Incorporated in this assessment was an analysis of the second ‘C’, customer convenience and accommodating choice, for the customer to acquire the solution. Put another way, the distribution of the product or service to the customer was a key question in determining a venture’s feasibility. If convenience and choice for the customer

334 Part 3: Developing entrepreneurial ventures

could not be built into the distribution channel of the product/service then the feasibility of the venture diminished. That is, there would be insufficient reach or insurmountable barriers to accessing the customer. Working through these issues strategically to arrive at feasible solutions is part of working through the marketing mix. In this chapter, we turn our attention more specifically to marketing planning, market research, the third ‘C’ – customer communication or the issues of promotion and building communities – and lastly discuss the vexed issue of the fourth ‘C’ – customer cost – by considering pricing strategies and the impact of including customisation options in the marketing mix.

THE COMPONENTS OF EFFECTIVE MARKETING Effective marketing is based on three key elements: marketing philosophy, market segmentation and consumer behaviour. A new venture must integrate all four elements when developing its marketing concept and its approach to the market. This approach helps set the stage for how the company will seek to market its goods and services.

MARKETING PHILOSOPHY Three distinct types of marketing philosophies exist among new ventures: production-driven, sales-driven and consumer-driven. The product-driven philosophy is based on the ‘build it and they will come’ belief that you should produce good products efficiently and worry about sales later. Product or production are the main emphasis; sales follow in the wake of production. New ventures that produce high-tech, state-ofthe-art output sometimes use a product-driven philosophy – and likely will suffer from it. A salesdriven philosophy focuses on personal selling and advertising to persuade customers to buy the company’s output, regardless of the product’s quality. When an overabundance of supply occurs in the market, this philosophy often surfaces. Some companies pride themselves on being able to sell a dead horse to a CEO! New car dealers, for example, rely heavily on a sales-driven philosophy. A consumer-driven philosophy relies on research to discover consumer preferences, desires and needs before production actually begins. This philosophy stresses the need for marketing research in order to better understand where or who a market is and to develop a strategy targeted towards that group. Three major factors influence the choice of a marketing philosophy: • Competitive pressure: Many times the intensity of the competition will dictate a new venture’s philosophy. For example, strong competition will force many entrepreneurs to develop a consumer orientation in order to gain an edge over competitors. If, on the other hand, little competition exists, the entrepreneur may remain with a production orientation in the belief that what is produced will be sold. • Entrepreneur’s background: The range of skills and abilities entrepreneurs possess varies greatly. While some have a sales and marketing background, others possess production and operations experience. The entrepreneur’s strengths will influence the choice of a market philosophy. • Short-term focus: Sometimes a sales-driven philosophy may be preferred due to a short-term focus on moving the merchandise and generating sales. Although this focus appears to increase sales (which is why many entrepreneurs pursue this philosophy), it can also develop into a hard-selling approach that soon ignores customer preferences and contributes to long-range dissatisfaction.

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Any one of the three marketing philosophies can be successful for an entrepreneur’s new venture. It is important to note, however, that over the long run the consumer-driven philosophy is the most successful, although many ventures do not adopt it. This approach focuses on the needs, preferences and satisfactions of the customer and works to serve the end-user of the product or service.

COMPETITIVE INFORMATION The following is a list of potential techniques to use to assess your competition and avoid paying a high-priced market research firm to collect information for you. 1

2

3

4

5

6

ENTREPRENEURSHIP

Networking. Speaking with people in the field will help you get a feel for what’s going on in IN PRACTICE your industry. Vendors, customers, and anyone who does business with companies in your field may have information on emerging competition. Venture capitalists can be a great source of information because of the due diligence they must perform with pending venture loans. Much like what happens during the start-up phase of a business, a person can become so immersed in a project that he or she develops tunnel vision. Social networking also can provide a fresh view of the industry. Related products. This market is the obvious place to look. Companies that can provide anything that complements your product or service are primed to become competition, because they also know what the customers’ needs are and how to fulfil them. Large companies whose customers are businesses will assess this issue very differently compared to a small business with the average person as its primary consumer. A good example of a complementary relationship is the one that exists among cameras, film, photo disks, and so on. The number and type of photographic products available have increased substantially in recent years, and different fields have capitalized on this trend. Value chain. Whereas related products fall on the horizontal axis of an industry, exploring the value chain forces a vertical assessment of potential the potential competition. In this situation, the potential competition is fully aware of, and understands, the business environment in which you operate. They already have easy access to suppliers, buyers, and services that you deal with on a daily basis. Companies with related competencies. One of the more ignored avenues involves companies that can take their expertise and apply it to an indirectly related field. Competencies can be both technological and non-technological. Just because one company has unparalleled customer service and sales in the cellular industry doesn’t mean the company couldn’t use the same spectacular service in the cable business. The perfect example of expanding on technological similarities is Motorola, whose original intent was to focus on the defence industry. Surely that was not an area cellular providers were examining when trying to anticipate potential competition! Internet. It goes without saying that the Internet is one of the premiere sources of information available to anyone who knows how to use it. Using search engines to access millions of web pages allows a business to easily scope out anyone that offers similar products or services. Searches can be both broad and defined. Most important, they can be done cheaply and as often as desired. It is best to use words that customers might use and avoiding technological or industry jargon when surfing, but try and brainstorming all possible relations to ensure a thorough and effective search. Queries to search engines, such as Bing, Google, and Yahoo! are logged by those search engines, along with basic connectivity information such as IP address and browser version. In the past, analysts had to rely on external companies to provide search behaviour data, but increasingly search engines are providing tools to directly mine their data. You can use search engine data with a greater degree of confidence, because it comes directly from the search engine. In Google AdWords, you can use Keyword Tool, the Search-based Keyword Tool, and Insights for Search. Benchmarks from Web Analytics Vendors. Web analytics vendors have many customers and thus a great deal of data. Many vendors now aggregate this real customer data and present it in the form of benchmarks that you can use to index your own performance. Benchmarking data is currently available from Fireclick, Coremetrics, and Google Analytics. Often, as is the case with Google Analytics, customers have to explicitly opt in their data into this benchmarking service. Once the sufficient information has been gathered, a plan to beat the current and emerging competition should be prepared. The plan created will be analogous to the business’s strengths and resources. Issues such as losing sales to another company could be addressed, a SWOT (strengths, weaknesses, opportunities, threats) analysis could be executed, or the plan to offer a new product or change price points could be outlined. Source: Adapted from Mark Henricks, ‘Friendly Competition?,’ Entrepreneur (December 1999): 114–17; ‘The Definitive Guide to Competitive Intelligence Data Sources,’ February 22, 2010, http://www.kaushik.net/avinash/competitive-intelligence-data-sources-bestpractices/ (accessed April 30, 2012); and ‘Gathering Competitive Information,’ United Technologies Corporation, http://utc.com/StaticFiles/UTC/StaticFiles/info_englishlanguage.pdf (accessed April 30, 2012).

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DEVELOPING A MARKETING PLAN A marketing plan is the process of determining a clear, comprehensive approach to the creation of customers. The following elements are critical for developing this plan: • current marketing research – determining who the customers are, what they want and how they buy • sales research and analysis – promoting and distributing products according to marketing research findings • marketing information system – collecting, screening, analysing, storing, retrieving and disseminating marketing information on which to base plans, decisions and actions • sales forecasting – coordinating personal judgement with reliable market information • evaluation – identifying and assessing deviations from marketing plans.19

CURRENT MARKETING RESEARCH The purpose of marketing research is to identify customers – target markets – and to fulfil their desires. For marketing research to be effective for the growing venture, the following areas warrant consideration: • The company’s major strengths and weaknesses: These factors offer insights into profitable opportunities and potential problems and provide the basis for effective decision making. • Market profile: A market profile helps a company identify its current market and service needs. How profitable are existing company services? Which of these services offer the most potential? Which (if any) are inappropriate? Which will customers cease to need in the future? • Current and best customers: Identifying the company’s current clients allows management to determine where to allocate resources. Defining the best customers enables management to more directly segment this market niche. • Potential customers: By identifying potential customers, either geographically or with an industry-wide analysis of its marketing area, a company increases its ability to target this group, thus turning potential customers into current customers. • Competition: By identifying the competition a company can determine which businesses are most willing to pursue the same basic market niche. By examining the competitor’s products an entrepreneur can establish how different the product offering will be and pre-empt the level of competitor response. • Outside factors: This analysis focuses on changing trends in demographics, economics, technology, cultural attitudes and governmental policy. These factors may have substantial impact on customer needs and, consequently, expected services. • Legal changes: Marketing research performs the important task of keeping management abreast of significant changes in governmental rates, standards and tax laws.20

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THE GUERRILLA MARKETING PLAN A business plan is essential for any entrepreneur planning to start an initiative; however, by the ENTREPRENEURSHIP time you include your market research results, pro forma statements and critical risks, your business plan will become a dense packet of information to be used when guiding your entire business – a document that few will read in its entirety. Given this fact, entrepreneurs should IN PRACTICE be able to quickly articulate the key aspects of their venture in a matter of a few minutes. One tool that can be used for this purpose is what is known as a guerrilla marketing plan. A guerrilla marketing plan forces an entrepreneur to specify the seven most important marketing issues that face their company. Of course, there will most certainly be more than seven key areas to address; however, by going through the exercise of consolidating the marketing topics that require the most focus, an entrepreneur will be better prepared to get to the heart of their concept, both when presenting to potential investors and when managing the business. The key is to address each area using no more than a sentence. Guerrilla marketing plans give people a quick understanding of exactly what is of the utmost concern to their business by eliminating much of the detail provided in your full business plan. Large companies make use of such plans by developing different ones for different products. For instance, Procter & Gamble develops a guerrilla marketing plan for each of its products. Although some companies choose to attach several pages of documentation to their plans, the key is to get the seven sentences right. Following are guidelines for developing a guerrilla marketing plan: •

•

•

•

•

•

•

You should begin your guerrilla marketing plan with a sentence that describes the purpose of your marketing. This sentence should be very specific and should address what impact your marketing initiative should have on a potential customer. Goals such as ‘to be more successful than my competitors’ or ‘to be more profitable’ are not useful. This sentence should quantify your overarching goal so that it is measurable. The point is to envision exactly what you want your customer to ideally do, and then to establish a goal for ensuring that customers will act in that way. The next sentence is meant for you to address the competitive advantages of the enterprise; in other words, what are the characteristics of the business that make it uniquely positioned to offer value to the public? The objective with this sentence is to outline your business’s strengths that are the most unique so that you can emphasise them in your marketing materials. You will address your target audience in the third sentence. By specifying exactly who will be exposed to a marketing campaign, you will find the process of engineering an effective plan to be much more straightforward. Companies often have more than one target audience, so guerrilla marketing plans should be written to address all potential customers in order to avoid losing sales to competitors. For the fourth point, a list is most appropriate. This topic addresses the marketing weapons that you will use. The important idea of this section is to include only those tools that the company can understand, afford and use properly. Countless tools are now readily available to entrepreneurs, so filtering out those that do not meet these three criteria will help you avoid making poorly directed investments. You should discuss the company’s market niche in the fifth sentence. Now that you have addressed the purpose, benefits and target market, understanding your marketing niche is the next logical step. The market niche should capture what customers most readily associate with your company. It could be speed, value, variety or any number of other characteristics. You will not be able to please everyone, so defining what your company is and what it is not will help to narrow your focus when promoting it to potential customers. The sixth sentence is where you will establish the identity of your company. Entrepreneurs should ensure that the marketing image they broadcast to the world is supported by the identity of their companies, which means that the companies’ operating procedures need to reinforce whatever identity they establish. The final sentence in your guerrilla marketing plan needs to explicitly state what percentage of projected gross sales you are willing to earmark as your marketing budget. The quality of your marketing materials will clearly reflect on your business, so this step requires a significant amount of research to ensure that the amount you have allotted will be sufficient for supporting all previous steps.

When developing your guerrilla marketing plan, all subsequent steps should be framed by the first sentence you write, which is meant to define the purpose of your plan. Entrepreneurs should theoretically be able to write a plan of this nature within five minutes, given its brevity. The more practice you get at articulating your business objectives, the easier you will find using tools – such as the guerrilla marketing plan – to communicate your business goals. Source: Adapted from Jay Conrad Levinson & Jeannie Levinson, ‘Here’s the plan’, Entrepreneur, February 2008, http://www.entrepreneur.com/magazine/entrepreneur/2008/february/188842.html ª 2012 Entrepreneur.com. Published by Entrepreneur Media, Inc., ª 2008.

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CURRENT SALES ANALYSIS An entrepreneur needs to continually review the methods employed for sales and distribution in relation to the market research that has been conducted. Matching the correct customer profile with sales priorities is a major goal in sales research. The following is a list of potential questions to be answered by this research. • Do salespeople call on their most qualified prospects on a proper priority and time-allocation basis? • Does the sales force contact decision makers? • Are territories aligned according to sales potential and salespeople’s abilities? • Are sales calls coordinated with other selling efforts, such as trade publication advertising, trade shows and direct mail? • Do salespeople ask the right questions on sales calls? Do sales reports contain appropriate information? Does the sales force understand potential customers’ needs? • How does the growth or decline of a customer’s or a prospect’s business affect the company’s own sales?

MARKETING INFORMATION SYSTEM A marketing information system compiles and organises data relating to cost, revenue and profit from the customer base. This information can be useful for monitoring the strategies, decisions and programs concerned with marketing. As with all information systems designs, the key factors that affect the value of such a system are: (1) data reliability, (2) data usefulness or intelligibility, (3) reporting system timeliness, (4) data relevance and (5) system cost.

SALES FORECASTING Sales forecasting is the process of projecting future sales through historical sales figures and the application of statistical techniques. The process is limited in value due to its reliance on historical data, which many times fail to reflect current market conditions. As a segment of the comprehensive marketing planning process, however, sales forecasting can be very valuable.

EVALUATION The final critical factor in the marketing planning process is evaluation. Because a number of variables can affect the outcome of marketing planning, it is important to evaluate performance. Most importantly, reports should be generated from an analysis of customer retention or loss as well as established customer preferences and reactions. This analysis can be measured against performance in sales volume, gross sales dollars or market share. It is only through this type of evaluation that flexibility and adjustment can be incorporated into marketing planning.

KEY CONSIDERATIONS FOR ENTREPRENEURS Marketing plans are part of a venture’s overall strategic effort.21 To be effective, these plans must be based on the venture’s specific goals. Here is an example of a five-step program designed to help entrepreneurs follow a structured approach to developing a market plan. Step 1: Appraise strengths and weaknesses, emphasising factors that will contribute to the company’s competitive edge. Consider product design, reliability, durability, price/quality ratios, production capacities and limitations, resources and need for specialised expertise.

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Step 2: Develop marketing objectives along with the short- and intermediate-range sales goals necessary to meet those objectives. Next, develop specific sales plans for the current fiscal period. These goals should be clearly stated, measurable and within the company’s capabilities. To be realistic, these goals should require only reasonable efforts and affordable expenditures. Step 3: Develop product/service strategies. The product strategy begins with identifying the endusers, wholesalers and retailers, as well as their needs and specifications. The product’s design, features, performance, cost and price then should be matched to these needs. Step 4: Develop marketing strategies. Strategies are needed to achieve the company’s intermediateand long-range sales goals and long-term marketing objectives. These strategies should include advertising, sales promotion campaigns, trade shows, direct mail and telemarketing. Strategies also may be necessary for increasing the size of the sales force or marketing new products. Contingency plans will be needed in the event of technological changes, geographic market shifts or inflation. Step 5: Determine a pricing structure. A company’s pricing structure dictates which customers will be attracted, as well as the type or quality of products/services that will be provided. Many business owners believe the market dictates a competitive pricing structure. But this is not always the case – many companies with a high price structure are very successful. Regardless of the strategies, customers must believe that the product’s price is appropriate. The price of a product or service, therefore, should not be set until marketing strategies have been developed.22

PERCEPTIONS OF A TARGET MARKET Failure to research customers can be costly ENTREPRENEURIAL Darlene Mann, entrepreneur and general partner of Onset Ventures, knows what happens when you fail to gain customer insight. EDGE In 1990, Ms Mann, as Verity, Inc. product marketing director led a team that launched a document search and retrieval software product on a false assumption about the customer. The team imagined that highly skilled technicians at the companies that purchased it would do the installation and operate the software. They were confident that the customers would see the product as a highly valuable addition to the workplace and consequently would place a high priority on mastering a complex product that was not easy to set up or maintain. However, in practice this assumption was flawed and customers actually only had access to limited resources and found the installation too difficult and their skills inadequate to use it. The team knew they had a problem when they found that only NASA’s Jet Propulsion Labs had been able to successfully install the software without assistance. It seemed that you had to be a rocket scientist to master it. A solution was at hand only after re-engineering the software to make it simple to use and easy to install. Thereafter the product was very successful, but only after the losses caused by a year of delays and the opportunities lost in repeat sales – all because they did not do their homework. The lesson they learned was that asking customers would mean learning quickly about what it would take to succeed in the market. Asking themselves and their customers the right questions would have saved time and money, two commodities that entrepreneurs often have in short supply. Source: Adapted from Darlene Mann (2000), ‘Hitting the market’, Inc., available at http://www.inc.com/articles/2000/03/19094.html, accessed 29 October 2014. Published by Inc., ª 2000.

MARKET SEGMENTATION Market segmentation is the process of identifying a specific set of characteristics (subgroups) that differentiate one group of consumers from the rest. The total market is often made up of submarkets

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On CourseMate Express read about how to practice dividing your customers into segments. Identifying your customer.

(called segments).23 For example, wine-related lifestyle segments in the Australian wine market have been classified as: ritual-oriented conspicuous wine enthusiasts, purposeful inconspicuous premium wine drinkers, fashion/image-oriented wine drinkers, basic wine drinkers and enjoyment-oriented social wine drinkers.24 Yet another example can be drawn from the ecotourism market in the outback of Australia which has such segments as: ‘harder’ ecotourists, who reflect a high level of environmental commitment and affinities with wilderness-type experiences; ‘softer’ ecotourists, who are much less committed on either dimension; and ‘structured’ ecotourists, by comparison, who reveal a strong pattern of commitment but a level of desire for interpretation, escorted tours and services/facilities usually more associated with mass tourism.25 The key to market segmentation is distinguishing the groups of customers that share the same notion of what is valuable in a product or service offering; then satisfying these customers by designing the customer experience is becoming increasingly important.26 Some individuals prefer high quality in some product categories while in other categories they may be indifferent to quality dimensions. The price may be higher for high-quality offerings but the market niche may also be smaller than for lower-priced competitors. This process of segmenting the market can be critical for new ventures with very limited resources. To identify specific market segments, entrepreneurs need to analyse several variables. As an example, two major variables that can be useful are demographic and benefit variables. Demographic variables include age, marital status, sex, occupation, income, location and the like. These characteristics are used to determine a geographic and demographic profile of the consumers and customers and their purchasing potential. The benefit variables help to identify unsatisfied needs that exist within this market. Examples may include convenience, cost, style, trends and the like, depending on the nature of the particular new venture. Whatever the product or service, it is extremely valuable to ascertain the benefits or what value a market segment is seeking in the product or service in order to further differentiate a particular target group. Psychographics is a term that has gained greater profile in the definition of market segments. Psychographics are statistical analysis of psychological characteristics of individuals which influence their buying behaviour. Table 10.3 shows segmentation variables for consumers and business markets. At the end of the chapter you can develop your ability to identify customer types further with the Experiencing Entrepreneurship exercise.

DELL LEARNS YOUNG Most people don’t know that one of the key marketing strategies that contributed to Dell Computer’s unbelievable success had nothing to do with the computer business. Dell actually discovered it as a 12-year-old kid in Houston, during one of their hot, sweltering, humid summers. EDGE Anyway, he decided one summer to be a paper boy. He wanted to make some extra money, and, as an entrepreneurial kid, that means running a paper route. He went down to the paper where he received a bundle of papers and a list of names to call or visit. The names were randomly picked people who did not have a subscription to the paper. Dell’s job was to begin calling everyone on the list and get some subscriptions sold. He sold one here and he sold one there, but he pretty soon began to notice a pattern. There were two categories of people who were much more likely to buy a subscription from him than anyone else. First, people who had just moved into a new home. And second, people who had just married. It makes sense right? They are going through life changes that dramatically increase the likelihood of them wanting and needing a paper subscription.

ENTREPRENEURIAL

cont.

»

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cont.

Most kids – and most adult business people – would say, ‘that’s neat’ and stop there. But Dell took the next step. He began to ask ‘how can I target these people and only these people, so that I’m spending my time, resources and my energy where I know it’s going to pay off best?’ The answer came when he discovered that public information available at the local courthouse could give him access to exactly who he wanted to target. He gathered a small army of 12-year-old kids and sent them all down to the courthouse on a regular basis. They wrote down everyone who had purchased a new home and everyone who had applied for a marriage licence. Michael Dell then spent his time selling to those people predisposed to buying. He didn’t try to be all things to all people, he narrowly and specifically defined who he wanted to spend his limited time and energy on, he had a much smaller list of potential buyers, and he did an enormous amount of business (for a paper boy!) because of it. When summer ended and Dell went back to school, he was actually making more money from his paper route than the teachers in his school. Source: Michael Cage, ‘Dell marketing strategies’, On Entrepreneurship, copyright ª EntrepreneursLife.com, available at http://www.entrepreneurslife.com/thoughts/entry/dell-marketing-strategies.

TABLE 10.3

SEGMENTATION VARIABLES FOR THE CONSUMER AND BUSINESS MARKETS

SEGMENTATION VARIABLES: CONSUMER MARKETS

SEGMENTATION VARIABLES: BUSINESS MARKETS

Demographics: age group (e.g. teens, retirees, young adults), gender, education level, ethnicity, income, occupation, social class, marital status Geographics: location (e.g. national, regional, urban/ suburban/rural, international), climate

Demographics: type (e.g. manufacturer, retailer, wholesaler), industry, size (e.g. sales volume, number of retail outlets), age (e.g. new, young growth, established growth, mature) Geographics: location (e.g. national, regional, urban/ suburban/rural, international), climate Business arrangement: ownership (e.g. private versus public, independent versus chain), financial condition (e.g. credit rating, income growth, stock price, cash flow)

Current purchasing situation: brands used, purchase frequency, current suppliers Purchase ready: possess necessary equipment, property, knowledge and skill sets Local environment: cultural, political, legal

Current purchasing situation: brands used, purchase frequency, current suppliers Purchase ready: possess necessary equipment, property, knowledge and skill sets Local environment: cultural, political, legal Customers served by the business: identify the business’s market Business’s perceived image: identify how targeted businesses are perceived by their customers

Benefits sought: price, overall value, specific feature, ease-of-use, service Product usage: how used, situation when used Purchase conditions: time of day/month/year when purchased, credit terms, trade-in option Characteristics of individual buyer: purchase experience, how purchase is made, influencers on purchase decision, importance of purchase Psychographics: personality, attitudes and lifestyle combined with demographics

Benefits sought: price, overall value, specific features, services, profit margins, promotional assistance Product usage: how used (e.g. raw material, component product, major selling item at retail level), situation when used Purchase conditions: length of sales cycle, set product specifications, bid pricing, credit terms, trade-in option, product handling Characteristics of buying centre: purchase experience, number of members, make-up of key influencers, willingness to assume risk

Source: KnowThis.com, ‘Tutorial: The principles of marketing’, Copyright ª KnowThis LLC. Used by permission.

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CONSUMER BEHAVIOUR Consumer behaviour is defined by the many types and patterns of consumer characteristics. However, entrepreneurs should focus their attention on only two considerations: personal characteristics and psychological characteristics. Traditionally some marketing experts have tied these characteristics to the five types of consumers: innovators, early adopters, early majority, late majority and laggards.27 The differences in social class, income, occupation, education, housing, family influence and time orientation are all possible personal characteristics, while the psychological characteristics are needs, perceptions, self-concept, aspiration groups and reference groups. This type of breakdown can provide an entrepreneur with a visual picture of the type of consumer to target for the sales effort. The next step is to link the characteristic makeup of potential consumers with buying trends in the marketplace. Table 10.4 shows the changing priorities that have shaped buying decisions. Each of these factors relates to consumer attitudes and behaviours based on education, the economy, the environment and/or societal changes. By using some of the common consumer characteristics and combining them with Table 10.4, the entrepreneur can begin to examine consumer behaviour more closely. TABLE 10.4

CHANGING PRIORITIES AND PURCHASES IN THE FAMILY LIFE CYCLE

STAGE

PRIORITIES

MAJOR PURCHASES

Fledgling – teens and early 20s

Self, socialising, education

Appearance products, clothing, cars, recreation, hobbies, travel

Courting – 20s

Self and other, pair bonding, career

Furniture and furnishings, entertainment and entertaining, savings

Nest building – 20s and early 30s

Babies and career

Home, garden, do-it-yourself items, baby-care products, insurance

Full nest – 30 to 50

Children and others, career, mid-life crisis

Children’s food, clothing, education, transportation, orthodontics, career and life counselling

Empty nest – 50 to 75

Self and others, relaxation

Furniture and furnishings, entertainment, travel, hobbies, luxury cars, boats, investments

Sole survivor – 70 to 90

Self, health, loneliness

Healthcare services, diet, security and comfort products, TV and books, long-distance telephone services

Source: Peter R. Dickson, Marketing Management, Fort Worth, TX: The Dryden Press, 1994: 91. Published by Cengage Learning, ª 1994.

An analysis of the way consumers view the venture’s product or service provides additional data. Entrepreneurs should be aware of five major consumer classifications. 1 Convenience goods – whether staple goods (foods), impulse goods (checkout counter items) or emergency goods and services – are items that consumers will want, but will not be willing to spend time shopping for. 2 Shopping goods are products consumers will take time to examine carefully and compare for quality and price. 3 Specialty goods consist of products or services consumers make a special effort to find and purchase.

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4 Unsought goods are items consumers do not currently need or seek – common examples are life insurance, encyclopedias and cemetery plots. These products require explanation or demonstration. 5 New products are items that are unknown due to lack of advertising or are new products that take time to be understood – when micro-computers were first introduced, for example, they fell into this category. Understanding these classifications is important both for selling to consumers and for choosing distribution channels.

MARKETING RESEARCH Several well-known techniques and strategies can assist entrepreneurs with effectively analysing a potential market. By using them, entrepreneurs can gain in-depth knowledge about the specific market and can translate this knowledge into a well-formulated business plan. Effective marketing analysis also can help a new venture position itself and make changes that will result in increased sales and market share. The key to this process is marketing research. Marketing research involves the gathering of information about a particular market, followed by analysis of that information.28 Before undertaking a campaign, the entrepreneur must know and understand marketing research procedures for gathering, processing and interpreting market information.

DEFINING THE RESEARCH PURPOSE AND OBJECTIVES The first step in marketing research is to define precisely the informational requirements of the decision to be made. Although this may seem too obvious to mention, the fact is that needs are too often identified without sufficient probing. If the problem is not defined clearly, the information gathered will be useless. In addition, specific objectives should be established. For example, one study has suggested the following set of questions for establishing objectives for general marketing research. • Where can potential customers go to purchase the good or service in question? • Why do they choose to go there? • What is the size of the market? How much of it can the business capture? • How does the business compare with competitors? • What impact does the business’s promotion have on customers? • What types of products or services are desired by potential customers?29

GATHERING SECONDARY DATA Information that has been compiled by others is known as secondary data. Generally speaking, secondary data are less expensive to gather than are new, or primary, data. The entrepreneur should exhaust all the available sources of secondary data before going further into the research process. Marketing decisions often can be made entirely with secondary data from the Internet or from other entrepreneurs. Secondary data may be internal or external. Internal secondary data consist of information that exists within the venture. The records of the business, for example, may contain useful information. External secondary data are available in numerous periodicals, and trade association and government publications.

On CourseMate Express read about a new mobile music app. Did Brian do his proper research? Learn from Brian’s mistakes

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Unfortunately, several problems accompany the use of secondary data. One is that such data may be outdated and, therefore, less useful. Another is that the units of measure in the secondary data may not fit the current problem. Finally, the question of validity is always present. Some sources of secondary data are less valid than others.

GATHERING PRIMARY DATA Books for Cooks-only. Using marketing research to stay ahead of the game in book retailing. Learn about what it takes on CourseMate Express.

TABLE 10.5

If secondary data are insufficient, a search for new information, or primary data, is the next step. Several techniques can be used to accumulate primary data. These are often classified as observational methods and questioning methods. Observational methods avoid contact with respondents, whereas questioning methods involve respondents in varying degrees. Observation is probably the oldest form of research in existence. Observational methods can be used very economically. Furthermore, they avoid a potential bias that can result from a respondent’s awareness of their participation under questioning methods. A major disadvantage of observational methods, however, is that they are limited to descriptive studies. Surveys and experimentation are two questioning methods that involve contact with respondents. Surveys include contact by mail, telephone and personal interviews. Mail surveys are often used when respondents are widely dispersed; however, these are characterised by low response rates. Telephone surveys and personal interview surveys involve verbal communication with respondents and provide higher response rates. Personal interview surveys, however, are more expensive than mail and telephone surveys. Moreover, individuals are often reluctant to grant personal interviews because they feel a sales pitch is forthcoming. (Table 10.5 describes the major survey research techniques.)

COMPARISON OF MAJOR SURVEY RESEARCH TECHNIQUES DIRECT/COLD MAILING

MAIL PANELS

TELEPHONE

PERSONAL IN-HOME

MALL INTERCEPT

Complexity and versatility

Not much

Not much

Substantial, but complex or lengthy scales difficult to use

Highly flexible

Most flexible

Quantity of data

Substantial

Substantial

Short, lasting typically between 15 and 30 minutes

Greatest quantity

Limited, 25 minutes or less

Sample control

Little

Substantial, but representativeness may be a question

Good, but non-listed households can be a problem

In theory, provides greatest control

Can be problematic; sample representativeness may be questionable

Quality of data

Better for sensitive or embarrassing questions; however, no interviewer is present to clarify what is being asked

Positive side, interview can clear up any ambiguities; negative side, may lead to socially accepted answers

In addition, there is the chance of cheating

In addition, unnatural testing environment can lead to bias

Response rates

In general, low; as low as 10%

70–80%

60–80%

Greater than 80%

As high as 80%

Speed

Several weeks; completion time will increase with follow-up mailings

Several weeks with no follow-up mailings, longer with follow-up mailings

Large studies can be completed in three to four weeks

Faster than mail but typically slower than telephone surveys

Large studies can be completed in a few days

CRITERIA

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TABLE 10.5 CRITERIA

COMPARISON OF MAJOR SURVEY RESEARCH TECHNIQUES (Continued ) DIRECT/COLD MAILING

MAIL PANELS

TELEPHONE

PERSONAL IN-HOME

MALL INTERCEPT

Cost

Inexpensive; as low as $2.50 per completed interview

Lowest

Not as low

Can be relatively expensive, but considerable variability

Less expensive than in-home, but higher than telephone; again, length and incidence rate will determine cost

Uses

Executive, industrial, medical and readership studies

All areas of marketing research, particularly useful in low-incidence categories

Particularly effective in studies that require national samples

Still prevalent in product testing and other studies that require visual cues or product prototypes

Pervasive-concept tests, name tests, package tests, copy test

Source: Peter R. Dickson, Marketing Best Practices, Fort Worth, TX: Harcourt College Publishers, 2000: 114. Published by Cengage Learning, ª 1994.

Experimentation is a form of research that concentrates on investigating cause-and-effect relationships. Normally the experimenter will actively manipulate one variable (the independent variable), attempt to hold all other variables constant and observe changes in the other (the dependent variable). For the entrepreneurial marketer, experimentation may be necessary since many messages fall on deaf ears, fail to hit their targets and do not elicit the desired response. Experimentation may actually make it easier – and more cost-effective – for companies to target the right customers. Marketers can model hundreds or even thousands of marketing messages accurately and efficiently – and they can adjust their messages accordingly. Here are some examples: • What effect will a price change have on sales? Here the price is the experimental variable and sales volume is the dependent variable. Measuring the relationship between these two variables would not be difficult if it were not for the many other variables involved. • Direct marketers have long used simple techniques such as split mailings to compare how customers react to different prices or promotional offers. Another example would be to roll out a product in a test market. A new product is typically introduced in a select number of cities. These cities must be representative of the overall national (or international) population. They should also be relatively unpolluted by outside influences (for example, media from other cities).30

Developing an information-gathering instrument The questionnaire is the basic instrument for guiding the researcher and the respondent through a survey. The questionnaire should be developed carefully before it is used. Several major considerations for designing a questionnaire are listed below. • Make sure each question pertains to a specific objective in line with the purpose of the study. • Place simple questions first and difficult-to-answer questions later in the questionnaire. • Avoid leading and biased questions. • Ask ‘How could this question be misinterpreted?’ Reword questions to reduce or eliminate the possibility they will be misunderstood. • Give concise but complete directions in the questionnaire; succinctly explain the information desired and direct respondents around questions that may not relate to them.

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When possible, use scaled questions rather than simple yes/no questions to measure intensity of an attitude or frequency of an experience – for example, instead of asking ‘Do we have friendly sales assistants?’ (yes/no), ask ‘How would you evaluate the friendliness of our sales assistants?’ and have respondents choose a response on a five-point scale ranging from ‘Very unfriendly’ (1) to ‘Very friendly’ (5).31

INTERPRETING AND REPORTING THE INFORMATION After the necessary data have been collected, they should be developed into usable information. Large quantities of data are merely facts. To be useful, they must be organised and moulded into meaningful information. The methods of summarising and simplifying information for users include tables, charts and other graphic methods. Descriptive statistics, such as the mean, mode and median, are most helpful in this step of the research procedure.

MARKETING RESEARCH QUESTIONS The need for marketing research before and during a venture will depend on the type of venture. However, typical research questions you might ask yourself to guide building your market intelligence include the following, here divided by subject:

Sales 1 Do you know all you need to know about your competitors’ sales performance by type of product and territory? 2 Do you know which accounts are profitable and how to recognise a potentially profitable one? 3 Is your sales power deployed where it can do the most good, maximising your investment in selling costs?

Distribution 1 If you are considering introducing a new product or line of products, do you know all you should about distributors’ and dealers’ attitudes towards it? 2 Are your distributors’ and dealers’ salespeople saying the right things about your products or services? 3 Has your distribution pattern changed along with the geographic shifts of your markets?

Markets 1 Do you know all that would be useful about the differences in buying habits and tastes by territory and kind of product? 2 Do you have as much information as you need on brand or manufacturer loyalty and repeat purchasing in your product category? 3 Can you now plot, from period to period, your market share of sales by products?

Advertising 1 Is your advertising reaching the right people? 2 Do you know how effective your advertising is in comparison to that of your competitors? 3 Is your budget allocated appropriately for greater profit – according to products, territories and market potentials?

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Products 1 Do you have a reliable quantitative method for testing the market acceptability of new products and product changes? 2 Do you have a reliable method for testing the effect on sales of new or changed packaging? 3 Do you know whether adding higher or lower quality levels would make new profitable markets for your products?

MARKETING ON THE INTERNET ‘Mobile apps, social media, advertising networks, video streaming, broadband, Flash, optimization! These are only a few of the Internet-related terms that have entered the marketing vocabulary in recent years … suggesting how complex the marketing job has become in the Internet age.’32 The Internet can assist a new venture’s overall marketing strategy. First, the Internet allows the business to increase its presence and brand equity in the marketplace. Company and brand sites provide the opportunity to communicate the overall mission of the company/brand, to provide information on attributes and/or ratings of the company/brand and to give information on the history of the company/brand. In addition, companies can easily communicate information on the marketing mix offered. Getting visibility and name recognition on the Internet requires a major marketing effort using leveraged approaches. Second, the Internet allows the company to cultivate new customers around the world and the entrepreneur should be prepared for global customers from day one. It works the other way too: competition has no borders as long as goods and services can be delivered in a timely and reliable manner. Providing important information about both the attributes of the company’s product and those of competitive products can aid in the decision-making process. In addition, websites can demonstrate products in actual use. This kind of information builds interest in the brand. The Internet also allows website visitors to match their needs with the offerings of the company. It is extremely important to remember that while traditional marketing techniques tend to be pushoriented (the company decides what the consumer will see and where), the Internet is pull-oriented (the consumer chooses what, when and how to look in greater detail). This technique requires website designers to think differently about what should or should not appear in the website offering. Third, the Internet can improve customer service by allowing customers to serve themselves when and where they choose. As more consumers begin to use the Internet, companies can readily serve these individuals without incurring expensive distribution costs. The expansion of the number of customers served requires only that the organisation has enough servers available. The fourth benefit to marketers relates to information transfer. Traditionally, companies have gathered information via focus groups, mail surveys, telephone surveys and personal interviews. However, these techniques can be very expensive to implement. In contrast, the Internet offers a mechanism for the company to collect similar information at a fraction of the cost. Not only can information be gathered from consumers, but information also can be shared with them. For example, the Internet can be used to provide expensive or specialised materials to consumers who request such information. It is important to point out that Internet marketing allows a start-up to go beyond market segmentation, a characteristic of the mass media, into a relationship of increasing trust and product/service complexity. The Internet allows entrepreneurs to target specific customers in different ways at different times. It allows low-cost ways to segment customers according to actual online behaviour and according to their relationship intensity.

On CourseMate Express read about how David can beat Goliath online.

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INTERNET SEGMENTATION AND CUSTOMER BEHAVIOUR Customers have different experiences at different times. Take satisfying your hunger, for instance. If someone is hungry on the way to work, they might grab a cuppa at the train station. Hunger is also culturally based: in India, thousands of dubbawallas deliver tiffin box lunches home-packed by wives to their husbands at work. Or in China a grand guanxi dinner requires a lazy susan to share the dishes. The point is that the hungry consumer requires different combinations of inputs depending upon the occasion. Physical businesses are limited in the number of occasions they can cater to. But on the Internet, people can construct their own occasions and return to a given website repeatedly, constructing different interactions each time. This allows the clever Internet-based entrepreneur to customise visitor experiences by performing usage-based market segmentation. This works for social entrepreneurs as well as business entrepreneurs. One way to segment customers this way is to categorise them as browsers, buyers and shoppers. Some website visitors are just surfers, or browsers. Here the trick is to have trigger words that prompt a visitor to go more deeply into the website, add extra content and lead to a purchase decision. Others are buyers who arrive ready to make a purchase straight away. Here the website should put nothing in the way of purchase behaviour. Finally, there are the shoppers. They arrive at the website knowing what it offers. They are motivated to buy, but don’t know quite just what. The interesting thing is that a customer might arrive one day as a buyer, another as a browser and the third as a shopper.

SMARTPHONE USERS: SEGMENT YOURSELF

ENTREPRENEURSHIP IN PRACTICE

Segmentation research gives you deeper insights into the persona of your customers. Let’s say you want to target the ‘always on’ smartphone users who are never more than arm’s reach from their device, even during sleep. One study found that there are seven distinct types of always-on consumers. 1

2

3 4 5 6 7

Prodigies (5 per cent), Constantly connected, mobile-centric, tech trendsetters. More Windows and Google geeks. Social media three times a day. Use mobile phone to make purchases. More likely to purchase online than in stores. Tribals (13 per cent), Hyperconnected, device agnostic. Social influential. Heavily influenced and strongly influencable through social media. More into Pinterest, Instagram and Flickr. More iPhone than Windows. Social media three times a day. Use mobile phone to make purchases. Use Internet to plan shopping trips. Personals (11 per cent), Mobile-savvy, love their phone. Shy away from social media. Prefer direct messaging. Heavy messaging app usage and low social media usage. Like the Yellow Pages. Pragmatists (18 per cent), Mobile professionals use their phone to balance their work and personal lives. Browsers (24 per cent), The largest group of smartphone owners are still learning about all the things they can do with their phone. Rarely use phone to purchase. Likely to use Google Translate. Occasionals (11 per cent), Use their smartphones for making calls, playing games and checking the weather. Most features go unused. Reachable through their PCs and through print ads. Talkers (13 per cent), Talkers use their phone mainly for verbal conversations and the occasional video call. Not much social media use. Rarely use phone to purchase.

Questions • What behaviours make each mobile segment unique? • Why does each segment use their smartphone? • How is it best to target them through apps and mobile web? • What time of day is best for reaching them? Source: Adapted from Experian Marketing Services (2014), ‘The always-on consumer’, published by Experian Information Solutions, Inc., ª 2014. http://www.experian.com/marketing-services/the-always-on-consumer-report.html?intcmp¼emsblog. Note: this was a US survey.

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RELATIONSHIP INTENSITY Another big difference with the traditional mass media is the ability of the Internet to create strong relationships with customers. We call this relationship intensity. Researchers have identified five stages of loyalty as the relationship develops over time.33 If we look at how customers interact with the business through these five stages, we see that each stage is called a life-cycle segment. As we see in Figure 10.1, for every 500 000 ads shown on the Internet, perhaps 80 viewers will become loyal, repeat customers. In this funnel model we see the steps that potential customers might take as they move towards becoming loyal customers.

Needs identification

500 000 ads are shown on web pages

Search for and gather information about alternative products or services

10 000 ad viewers become website visitors

Evaluate alternatives and make selections

900 website visitors become shoppers

Purchase

500 website shoppers complete their purchases

Conversion of shoppers into loyal supporters of product, service and brand

FIGURE 10.1 FUNNEL MODEL OF CUSTOMER ACQUISITION, CONVERSION AND RETENTION

80 purchasers become loyal, repeat customers

SOCIAL MEDIA MARKETING Today our world is dominated by social networks, online communities, blogs, wikis, and other online collaborative media. Social media marketing describes the use of these tools for marketing purposes. The most common social media marketing tools include Twitter, blogs, LinkedIn, Facebook, Flickr and YouTube. There are three important aspects to consider with social media marketing: 1 Create something of value with an event, a video, a tweet or a blog entry that attracts attention and becomes viral in nature, as in viral marketing. This viral replication of a message through user to user contact is what makes social media marketing work. 2 Enable customers to promote a message themselves with multiple online social media venues. Fan pages in Twitter and Facebook are examples of this. 3 Encourage user participation and dialogue. A successful social media marketing program must fully engage and respect the customers with online conversations. Social media marketing is not controlled by the organisation.34 As you can see in these three elements, the real goal of social media marketing is to create a conversation among customers in your market space – a type of word-of-mouth marketing that reaches a critical mass. Why is this so critical for entrepreneurs and their start-up ventures? Researchers focused on social media marketing have pointed to the following facts: • Facebook is now approaching one billion users. (Forty times Australia’s population and fast approaching the size of China’s.)

Social media won’t help when everything goes pear-shaped. On CourseMate Express read about the perils of marketing the Olympic torch.

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• According to a social media study, three-quarters of the online population is comprised of frequent social media users. • There are nearly 25 billion searches done online every month. • Australia’s online retail spending was $15.25 billion in April 2014, representing around 6.6 per cent of traditional retail spending.35 In the US, Forrester Research estimates that online retail spending will reach $248.7 billion in 2014, or 8 per cent of the entire retail market.36

KEY DISTINCTIONS OF SOCIAL MEDIA MARKETING It is a complete misconception to think that social media marketing is just using online social media sites to do traditional marketing. The traditional marketing approach, emphasising the 4Ps (product, price, place and promotion), still has some important lessons for marketing, but in the new terrain of social media, it has to be adapted or in some areas changed completely. That is why we presented the 4Cs based on the customer-focused concept in this new age of marketing. In addition, there are several other aspects that distinguish social media marketing from the traditional marketing and it even extends the concepts of Internet marketing. One distinction is referred to as control versus contributions. Traditional marketing seeks to control the content seen by the audience and attempts to dominate the territory by excluding their competitors’ message. Social media marketing emphasises audience contribution and relinquishes control over large parts of the content. Effective social media marketing can sometimes influence what participants say and think about a brand, but rarely can they control the conversation. A second important distinction is trust building. Firms cannot fully control the content that users will create, so a venture must develop trusting relationships with the customer audience. Unlike traditional advertisements in which consumers have grown to expect some exaggeration to be applied to a product, on social media it is important to be completely honest. Any firm that bends the truth will be held accountable and have to explain those actions. A third distinction is in how social media messages are consumed. Traditional marketing was ‘one-way’ from the firm to the customers. Social media involves ‘two-way communication’ to an audience that is interested in responding. If the message being delivered is boring, inaccurate or irrelevant, the customer will look elsewhere. Social media creates an ongoing conversation between the new venture and the customer.37

DEVELOPING A SOCIAL MEDIA MARKETING PLAN A social media marketing plan details an organisation’s social media goals and the actions necessary to achieve them. Key among these actions is the creation of solid marketing strategies without which there is little chance of successfully executing the plan. Here are some critical steps to keep in mind. • Listen. What people are saying about a company enables the organisation to determine its current social media presence, which in turn guides the setting of social media goals and strategies to achieve them. • Identify. The target market (niche) should be identified so marketing strategies can be organised to efficiently reach those most receptive customers and eventually advocates. • Categorise. Social media platforms can be categorised by target market relevancy. In other words, a company should focus its efforts on the social media sites where its target audience resides in the greatest numbers, resulting in a higher return on investment (ROI).

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• Appraise. The location, behaviour, tastes and needs of the target audience, as well as the competition, need to be appraised to determine an organisation’s strengths and weaknesses and the opportunities and threats (see SWOT analysis in Chapter 11) in the environment. • Implement. Choosing the right tools is accomplished by finding the social media sites where the target audience resides and then focusing the company’s social media efforts on those platforms. • Collaborate with platform members as a means of establishing a mutually beneficial relationship with the platform participants. Social media is a key way to build relationships. People who feel a personal connection with a company are apt to like and trust the associated brand or product. A faceless corporation is unlikely to inspire confidence, but seeing the people behind the brand can build customer loyalty and support. • Contribute content to build reputation and become a valued member, helping to improve the community. A brand or company can be positioned as thought leaders or experts in an industry by showcasing their unique knowledge. This positioning can develop positive equity for that brand or company; if a firm knows more about the subject area than anyone else, it signals that its product will most likely be of higher quality. • Convert strategy execution into desired outcomes such as brand building, increasing customer satisfaction, driving word-of-mouth recommendations, producing new product ideas, generating leads, handling crisis reputation management, integrating social media marketing with PR and advertising, and increasing search engine ranking and site traffic. • Monitor. Evaluate the organisation’s social media marketing initiatives.38 These keys steps for a social media marketing plan are just a beginning. It is most important to develop an approach that links the specific goals of the entrepreneur with the marketing strategies. The specifics will depend on information from listening to and observing the target market.

MOBILE MARKETING Mobile computing is the use of portable wireless devices to connect to the Internet. It enables people to access data and to interact on the social web while on the move as long as they are in range of a cellular or wi-fi network. Common mobile computing devices include mobile phones, PDAs (portable digital assistants), smartphones, tablet PCs, and netbooks and iPads. Mobile phones provide wireless voice communications and short message service (SMS) for sending and receiving text messages. PDAs are handheld computers that frequently fuse pen-based input to function as personal organisers, thus allowing users to synchronise files with larger computers. Mobile devices are now within everyone’s reach, and thus people are constantly connected with their social networks. This means that participants in online social networks are always on and always connected. As a result, people tend to post and share content on social networks more often. Authors Barker et al. reported that nearly a third of Facebook’s almost one billion active users are currently accessing Facebook through their mobile devices. Twitter shows similar statistics, with reports that 95 per cent of Twitter users own a mobile phone, and half of the users access Twitter through their mobile device. It is the way of the future.39 Mobile marketing is a fast-paced and high-impact marketing tool that many companies have started to use very successfully as part of their overall marketing strategy. Many companies are now

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using mobile social media applications as their standard communication strategy to connect with consumers. It can be defined as a group of mobile marketing applications that allow the creation and exchange of user-generated content. Mobile computing provides a plethora of marketing opportunities, such as text messaging, mobile applications and mobile advertising.

GREEN ENTREPRENEURIAL MARKETING

On CourseMate Express read about strategies to gain a green foothold in the market. Don’t let scepticism stifle your interest.

In keeping with this book’s sustainability theme, we note that the advent of the green economy coincides with the new global era of entrepreneurship. Green marketing is not just a trendy buzzword. Consumers – particularly the youngest ones – pay attention not only to price and quality but also to social and environmental values, as witnessed in the remarkable growth of the global market for organic and environmentally friendly products. Recyclability, reusability, biodegradableness and positive health effects are definitely in. Marketing has such a vital role to play because it can ‘decouple’ material consumption from consumer value and can facilitate both innovation and choice for sustainable consumption. It can help consumers to find, choose and use sustainable products and services, by providing information, ensuring availability and affordability, and setting the appropriate tone through marketing communications. Green marketing is a movement and it is also a controversy. It has also become an area of fervent research. One thing is for sure: green marketing has become an important marketing strategy for entrepreneurial companies that aim to help improve the environment and position themselves as responsible organisations, all while attempting to drive sales. But entrepreneurial businesses need to carry out sustainable marketing that actually delivers on green objectives, not just green theming.40 That is because much of green marketing has been, and in some cases still is, nothing but deception by the business community. Greenwashing is defined as: ‘the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service or technology’.41 However, many green consumers are increasingly savvy about greenwashing and are seeking out reliable eco-labelling information and similar resources to help them make informed decisions about the green credentials of products and services. While many eco-labels are issued by non-profit organisations, some retail stores are becoming information centres by offering reliable and detailed information, supplier scorecards or fact sheets about the environmental impacts of particular products. An example of what it takes to achieve a truly sustainability-focused business can be drawn from a study of ecotourism. The authors of the study found three critical success factors for an ecotourism business. First, the business must actively contribute to minimising the carbon footprint. Second, there must be close engagement and involvement with local communities in managing environmental conservation and the communities should directly share in the economic benefit of the tourism enterprise. And third, the coordinated marketing by the enterprise effort involving both related public and private organisations must be inclusive of the local area and avoid marginalising the local community. This level of commitment and broader engagement is typical of businesses using green marketing strategies and it moves the business beyond the risks of greenwashing. Marketing based on sustainability principles engages environmentalists, local communities, entrepreneurs and government bodies meaningfully to achieve the objectives of sustainable development.42

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GREEN ENTREPRENEURSHIP: THREE KEYS TO STARTING A GREEN INTERNET BUSINESS For aspiring eco entrepreneurs, starting a green, home-based business is a dream. However, starting any business, even an Internet business, takes a lot of groundwork. Doug and Corey invested a lot of time in preliminary research – researching the market, to identify a profitable sustainable product to sell, vetting bamboo textile suppliers, scoping technology platforms and learning Internet marketing strategies. Doug offered three key tips for aspiring green entrepreneurs interested in starting an e-commerce business selling sustainable products: •

•

•

ENTREPRENEURIAL EDGE

Conduct exhaustive market research: Evaluate the demand for your product or service via intensive keyword research to see how many people are searching for what you’re offering on a monthly basis. Use a tool like Google’s Keyword Tool, invest the time it takes to ensure there’s an audience for your particular green business idea. Be picky about your suppliers: Whether you’re looking for product suppliers or hiring a company to do your drop shipping or design your e-commerce site, be sure you do a lot of research to ensure they’re a good match. Ask lots of questions and get anything you agree upon in writing. Don’t be distracted by shiny marketing objects: The Internet abounds with the latest and greatest Internet marketing tools, systems, and products that promise ‘Traffic on autopilot’, ‘6 figures in 6 days!’ ‘Make money while you sleep,’ etc. Most of them will cost you money – sometimes a lot of money – but not impact your business, so try not to go down every Internet marketing rabbit hole. Instead, do your keyword research, develop a search engine optimisation (SEO) strategy, create great content that people want to link to and build a social presence organically. Source: CSR Wire (2012), ‘Green earth bamboo: An inside look at a profitable green online business’, 13 March 2012, http://www.csrwire.com/press_releases/33879-Green-Earth-Bamboo-An-Inside-Look-at-a-Profitable-Green-Online-Business. Copyright ª 2012 by Green Marketing TV. With permission from LornaLi.com.

So entrepreneurial start-ups need to take a position on green marketing or they will be disadvantaged in the marketplace. That is now leading companies to things like carbon footprint labelling to indicate the product’s carbon footprint. Eco-labelling allows customers to compare and shop for items which require less energy to produce.43 Some of the buzzwords that have been getting entrepreneurial airplay are GM-free, dolphin-friendly, biodegradable, energy efficient, additive-free, not tested on animals, fair-trade and free range. LOHAS (lifestyles of health and sustainability) consumers are part of a $290 billion market. Typically more educated with higher incomes, they choose a sustainable product even if it is more expensive. For them non-GMO (genetically modified organism), ABF (antibiotic free) and gluten-free are the key selling points.44 LOHAS awareness is growing around the world, especially in Taiwan, Singapore, South Korea, New Zealand and Australia.

WHY YOU MUST HAVE A GREEN BUSINESS BLOG As far as your online presence goes, developing a blog is nearly a must. Getting the word out about your green business will help drive customers to your website and grow your business, and as part of a comprehensive green marketing strategy, a blog is a powerful tool. Read on to find out why.

ENTREPRENEURSHIP IN PRACTICE

What is a blog? Short for ‘web log’, a blog is a regularly updated website (or portion of a website) that serves a variety of purposes – it can be a platform from which to comment on news or developments, provide product information and updates, convey personal stories, post media such as video, photographs, music, or audio files, or communicate about various events. Most blogs also have interactive capabilities allowing readers to comment and participate in the conversation, making a blog much more open-ended than a simple static website.

cont.

»

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Why have a green business blog and a main business website? As you can see, blogs are highly versatile, offering your green business an alternative format for communicating with your clients. If you’re looking for ways to build your business, a green blog will allow you to share updates about your company, including things like product launches, changes in staff, research completed, operational changes, mergers and acquisitions, and so on. A green business blog also gives you the ability to communicate special offers to your customers, such as sales, contests, incentives, and special events. And as an eco-friendly business, you may even want to include green living blog posts as you encourage your customers to live more natural lives. More than that, a good blog can also be a place where you interact with your customers – a form of two-way communication. By using things like surveys and polls, you have the ability to ascertain what your clientele really wants. And by sharing how your business works from the inside – how you bake your organic cookies or what your eco dry cleaning methods are like – you may also engage customers in a conversation about how you can improve. A blog gives you a voice, but it also provides a way for your customers to have a voice as well and can therefore be a highly effective way to grow customer loyalty. The benefits of blogging as a green business marketing strategy But your blog isn’t just about communicating with current clients – it can also be a way to gain new ones. Spiders sent by search engines will regularly crawl your website looking for new content. But they are very sophisticated and prefer fresher information over stagnant content. Think of the spiders as living organisms with new content their food – by adding new content with relevant keywords to your website through a blog, they’ll eat it up and keep coming back (more frequently) for more. In many ways, fresh content is the future to obtaining fabulous SEO results so that you move up in the search results. New content is important for search engine optimisation (SEO) purposes, but so are keywords. What are keywords? Imagine you’re online looking for an eco-friendly cleaning company. You may go to Google or Yahoo and type in search terms such as ‘green cleaner’ or ‘natural home cleaning’ to find a green business in your area. These search terms are keywords. Keywords are used by search engines to return results when someone searches for a particular item. The key is to use the most popular keywords in a strategic fashion, but that’s for another post. The point here is to remember that blogging allows you to increase the quality and quantity of keywords on your website, which makes spiders happy. Blogging has one more green marketing advantage – it allows you to link from a blog post to relevant pages on your website. This is called interlinking and is also beneficial when it comes to optimising your website for search engines. So as you plan your green marketing strategy, don’t leave ‘blog’ off of the list of online tools you’ll use to increase customer loyalty, grow your client base, and build a solid online presence. For the newbie blogger the work may seem daunting, but as you work at it, green blogging can be a great deal of fun, and the dividends are tremendous. Source: Maryruth Belsey Priebe, ‘Why you must have a green business blog’, Green Marketing TV, 25 June 2010, http://www.greenmarketing.tv/2010/06/25/green-business-blog. Copyright ª 2010 by Green Marketing TV.

Consumer surveys show that consumers would prefer to choose a green product all other things being equal. But those ‘other things’ just don’t add up. The Euromonitor Global Consumer Trends 2013 survey found that nearly 70 per cent of respondents were ‘somewhat to very willing’ to spend more on a green product when compared to a similar ‘regular’ product. Young, well-educated consumers with more disposable money to spend are more likely to pay more for green products but they will still not forgo product performance or effectiveness measures for the privilege.45 But don’t get your hopes up yet. The situation is actually quite grave as far as ecological consumerism is concerned. The World Business Council for Sustainable Development says that current global consumption patterns are unsustainable and that efficiency gains and technological advances alone will not be sufficient to bring global consumption to a sustainable level. Changes will also be required to consumer lifestyles, including the ways in which consumers choose and use products and services.46 Survey after survey shows consumers are, on the whole, concerned about their impacts on the environment and willing to act, but they do not always follow through. The reasons for that are

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numerous: some green choices aren’t cost-effective, it’s inconvenient to give up certain things and there is a general lack of understanding or confusion around areas like product labelling. If you want to follow green marketing trends, Table 10.6 provides some useful websites to bookmark or save as favourites. TABLE 10.6

PLACES TO STUDY ENTREPRENEURIAL GREEN MARKETING

http://www.buylesscrap.org

BUY (LESS) provides a means for people to donate directly to charity and reduce consumption.

http://www.dotherightthing.com

‘Unfiltered’ ideas about how companies can improve their service, their activity in the world, their impact or anything else.

http://ecopreneurist.com

Provides news and advice on sustainable and social entrepreneurship.

http://www.globalcool.org

Global Cool Foundation inspires people to save the planet through taking individual action in reducing their carbon footprint.

http://www.grist.org

Provides an irreverent, humorous source of all things green.

http://www.sustainablemarketing.com

Provides information on green and organic marketing.

http://www.theclimategroup.org

Climate Group is tracking the net effect of a list of household name companies introducing a green innovation.

http://www.wbcsd.org

The World Business Council for Sustainable Development is a CEO-led organisation of forward-thinking companies.

The sad fact is that consumers have just not reached the ‘tipping point’, the point at which the momentum for change to the new product becomes unstoppable. The truth is that many people think that global warming has not yet reached the point where consumers are willing to compromise on convenience, price and performance47 and attitudes are changing only very slowly. For instance in Malaysia, a `No Plastic Bag’ campaign, despite support from retailers, confronted negative consumer attitudes that favoured the convenience and normality of plastic bags.48 Norwegian tourists still want their dream trip to New Zealand despite the CO2 emissions impact of extreme long-haul travel to that country.49 While most Australian women claim that environmentally friendly attributes were ‘important’ or ‘very important’, only 49 per cent are willing to pay up to 10 per cent more, another 27 per cent were not willing to pay any more and only 25 per cent were willing to pay over 10 per cent more.50 The level of ecological concern varies widely around the world since geography and culture greatly influence attitudes towards the environment, so what follows about the American public may not necessarily be true for Australians or Chinese. The Ecological Roadmap is a market segmentation survey conducted by American Environics that looks at environmentalist identity, especially the chasm between two core values: • Ecological fatalism: People who believe that some amount of pollution is unavoidable in industrial societies and accept it as a part of life. They feel that there is little they can do to change this fact. • Ecological concern: People who believe that today’s environmental problems are a result of industrial and personal disregard for the environment. They feel that the trend towards environmental destruction is unacceptable and reject the notion that job protection or economic advancement should be allowed at the expense of environmental protection.51

On CourseMate Express read about how a donkey, a goat and some chickens generated $640 000 for Oxfam.

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The findings are revealing for the future of entrepreneurial activities within the movement towards a green economy.52 (See the Experiencing Entrepreneurship exercise ‘The 10 environmental world views’ at the end of this chapter.)

ENTREPRENEURSHIP

WHAT DOES IT TAKE TO REVOLUTIONISE AN INDUSTRY? CHECK OUT ELON MUSK

If you think about revolutions in car manufacturing, you may nominate Henry Ford as an entrepreneur who had a significant impact and changed the face of the industry. Yet Henry Ford IN PRACTICE did not invent the automobile, nor did he invent the production methods that revolutionised the industry. However, he did bring these things together, which innovated and changed the market dynamics forever. Today, changes are afoot in the car industry, and this time the entrepreneur who may be remembered has neither invented a revolutionary power drive, or new production methods. Yet Tesla’s CEO, Elon Musk, has a vision, immense passion and a good amount of courage that parallels Henry Ford. Elon Musk, like Henry Ford, has a history of entrepreneurial ambition and a pioneering spirit. Before the Ford Motor Company, Ford had started and left the Henry Ford Company. Musk had started and left Zip2 (making his fortune by selling to Alta Vista), and then X.com (which merged with Confinity to form Paypal, eventually sold to eBay). Ford had interests in air travel, an emerging industry at that time, and manufactured the Tri-Motor plane. Musk has an interest in space travel, today’s emerging industry, and his firm SpaceX has successfully built Falcon 9, the first commercial operation of space flight delivering a payload for NASA to the International Space Station. The similarity in characteristics don’t stop there. Ford left the Henry Ford Motor Company because of disagreements with the stockholders regarding matters of car design. Later, in his new company, Ford also bought out all the other investors in the Ford Motor Company to eliminate their meddling in company affairs. Ford was single minded about how things should be done. Musk has also run into conflict with his co-investors and executive management teams at Tesla. One of the founding partners, Martin Eberhard, left Tesla following ongoing disagreements with Musk. Two subsequent CEOs also found themselves out of work, and Musk assumed full responsibility for the company in 2008. He needed the job done his way. Both Ford and Musk have taken bold, radical steps in enabling their vision. For Henry Ford, a major challenge emerged with staff turnover given the repetitive nature of assembly line manufacturing. Ford took the unprecedented step of doubling employee wages that put a halt to the discontent and earned him a loyal workforce. For Musk, the issue of market penetration for an all-electric vehicle is hampered by the lack of infrastructure and market awareness. Musk has addressed the infrastructure issue by building recharge stations across the United States, independent of the traditional fuel distribution networks. To raise market acceptance, Musk decided that the electric vehicle evolution needed a boost and, therefore, took the radical step to open the firm’s patent portfolio for all to use in order to accelerate the market take-up of the new technology. For Ford, the innovation that grounded his success was the assembly line. This radically new approach (at the time) meant that Ford could make an affordable car for the masses. For Musk, the commitment to bringing an all-electric vehicle to market through product design and price is an imperative in a world in dire need of clean energy technologies. Creating the market for an electric vehicle requires overturning stereotypical electric car perceptions of being suitable only for short distances, poor performance and mediocre styling. The innovation in Tesla’s case is not a production issue, but one of product design that can capture the imagination of purchasers and deliver performance for mass market appeal. Elon Musk is on the case and, upon establishing the performance credentials of the Tesla vehicle, is progressively introducing new models and reducing the price point to infiltrate the closely-held market segments owned by the traditional petrol-fueled vehicle makers. Add all this together and it is apparent that the characteristics of the person – being committed to a vision, singlemindedness and a willingness to take bold steps – are fundamental to revolutionising industries. But let’s not discount the fact that Elon Musk made the money to invest in this vision through his earlier entrepreneurial pursuits. Henry Ford also needed the money and his talent to attract the attention of investors by exhibiting winning characteristics, and demonstrating investable skills were key. Couple the person with the reliability of the technology to deliver the product to a mass market along with necessary investment, and you have a revolutionising combination. References: The Henry Ford, ‘The Innovator and Ford Motor Company’ and ‘Chronology’, available at: https://www.thehenryford.org/ exhibits/hf/default.asp, accessed 10/01/2016; Drake Baer, 2014, ‘9 Critical Decisions That Shaped Elon Musk’s Extraordinary Career’, The Business Insider, available at http://www.businessinsider.com.au/elon-musk-critical-career-decisions-2014-10?r=US&IR= T#1988-moving-from-south-africa-to-north-america-for-college-1, accessed 10/01/2016; Jesse Brown, 2015, ‘The Success of Elon Musk’, Addicted2Success, available at http://addicted2success.com/entrepreneur-profile/elon-musk/, accessed 10/01/2016; Drake Baer, 2014, ‘The Making Of Tesla: Invention, Betrayal, And The Birth Of The Roadster’, The Business Insider, available at http://www.businessinsider.com.au/tesla-the-origin-story-2014-10, accessed 10/01/2016.

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PRICING STRATEGIES One final marketing issue that needs to be addressed is that of pricing strategies. Many entrepreneurs, even after marketing research is conducted, are unsure of how to price their product or service. Many factors affect this decision – the degree of competitive pressure, the availability of sufficient supply, seasonal or cyclical changes in demand, distribution costs, the product’s life cycle stage, changes in production costs, prevailing economic conditions, customer services provided by the seller, the amount of promotion done and the market’s buying power. Obviously, the ultimate price decision will balance many of these factors and, usually, will not satisfy all conditions. However, awareness of the various factors is important. Other considerations, sometimes overlooked, are psychological in nature: • in some situations, the quality of a product is interpreted by customers according to the level of the item’s price • some customer groups shy away from purchasing a product where no printed price schedule is available • an emphasis on the monthly cost of purchasing an expensive item often results in greater sales than an emphasis on total selling price • most buyers expect to pay even-numbered prices for prestigious items and odd-numbered prices for commonly available goods • the greater the number of meaningful customer benefits the seller can convey about a given product, generally the less will be the price resistance.53 Pricing procedures differ depending on the nature of the venture – retail, manufacturing or service. Pricing for the product life cycle is presented in Table 10.7; however, this might be applied to any type of business. The table demonstrates the basic steps of developing a pricing system and indicates how that system should relate to the desired pricing goals. Customer demand and sales volume will vary with the development of a product. Therefore pricing for products needs to be adjusted at each stage of their life cycle. With this general outline in mind, potential entrepreneurs can formulate the most appropriate pricing strategy. Further tools are available online that can assist the entrepreneur to conduct a thorough analysis of pricing strategies. The pricing strategy checklist can provide entrepreneurs with reference points for establishing and evaluating pricing strategies for their ventures.

THE EFFECT OF CUSTOMISATION ON PRICING STRATEGIES Today, customers are also expecting greater variety and choice and price will be influenced by the extent that a firm may be able to customise their offering. From a marketing perspective the customer may experience customisation in one of two extremes. The first is mass customisation and the second is total customisation.54 With mass customisation, the customisation happens only at the stage of assembly, allowing the component and basic modules to be produced in volumes sufficient to maintain an affordable economic cost for the business which can produce a customised product for the customer at a price they are willing to pay. For example, recruitment firms may use a centralised database and allow users to filter and extract information based on their specific needs through an interactive website. The database contains standardised information and the customer can mix and match information from the fields contained in the database to customise the output to suit their particular specification.

Go online to see the pricing strategy checklist

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TABLE 10.7

PRICING FOR THE PRODUCT LIFE CYCLE

PRODUCT LIFE CYCLE STAGE

PRICING STRATEGY

REASONS/EFFECTS

Skimming – deliberately setting a

Initial price set high to establish a quality image, to provide capital to offset development costs and to allow for future price reductions to handle competition

Introductory stage

Unique product

high price to maximise short-term profits

Non-unique product

Penetration – setting prices at such a low level that products are sold at a loss

Allows quick gains in market share by setting a price below competitors’ prices

Growth stage

Consumer pricing – combining penetration and competitive pricing to gain market share; depends on consumer’s perceived value of product

Depends on the number of potential competitors, size of total market and distribution of that market

Maturity stage

Demand-oriented pricing – a flexible strategy that bases pricing decisions on the demand level for the product

Sales growth declines; customers are very price-sensitive

Decline stage

Loss leader pricing – pricing the product below cost in an attempt to attract customers to other products

Product possesses little or no attraction to customers; the idea is to have low prices bring customers to newer product lines

Source: Adapted from Colleen Green, ‘Strategic pricing’, Small Business Reports, August 1989: 27–3

Total customisation involves the user in designing or co-creating the product or service. In this mode of customisation there are no standardised components but instead the customer is involved in the process of designing the parts of the product or service they need. This involves extensive interaction with the user at the early stages of the product/service experience and adds to the responsibility of the producer to work with the customer to create the specifications that meet the customer’s preferences. Of course this can be complex in sophisticated manufacturing environments, but in a service environment it can be as simple as empowering your people. For instance, in 2006 the Ritz Carlton changed its service policy from one of prescribed service protocols (always carry the guests’ luggage, for example) to one of empowering their staff to personalise the guest’s experience to be unique, and, all being well, memorable, for the right reasons of course. This placed the emphasis and responsibility of service provisioning on the staff in response to the specific requests and needs of the customer. Total customisation imposes a higher cost to the production or service provision, but research has found that customers place value on being part of making the product or service experience their own and are prepared to pay to have their specific needs and preferences met.

PRICING ONLINE Today’s Internet start-ups are finding unique ways of generating revenue from the very beginning. There are numerous variations of revenue models, including freemium, affiliate, subscription, virtual goods and advertising. Let’s briefly examine these. • Freemium model: Offers a basic service for free, while charging for a premium service with advanced features to paying members. Examples of companies that have used this method

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•

•

•

•

include Flickr and LinkedIn. The biggest challenge for businesses using the freemium model is figuring how much to give away for free so that users will still need and want to upgrade to a paying plan. If most users can get by with the basic free plan, they won’t have a need to upgrade. Affiliate model: The business makes money by driving traffic, leads or sales to another, affiliated company’s website. Businesses that sell a product, meanwhile, rely on affiliated sites to send them the traffic or leads they need to make sales. Like businesses that rely on advertising, high-traffic sites have an easier time making money using affiliate links than sites that are just starting out. The biggest challenge may be reader trust and proper targeting. It’s worth the time researching those in your market niche and initiating conversations with them. Subscription model: This requires users to pay a fee (generally monthly or yearly) to access a product or service. If you are creating a long-term relationship with customers, then this model would be better in the long run. However, you need content and features every month that will be new and exciting. You should also recognise that monthly membership sites have a high attrition rate – after the first time they log in, they forget about it and never come back. Virtual goods model: Users pay for virtual goods, such as upgrades, points or gifts, on a website or in a game. Virtual goods come in all shapes and sizes. The attraction of virtual goods is that margins are high, since goods essentially only cost as much as the bandwidth required to serve them, which is generally almost zero. Advertising model: Advertisements are sold against the traffic of the site. Simply put, the more traffic you have on your site, the more you can charge for ads (additional demographics about your site’s visitors, such as age, gender, location or interests, also affects the amount you can charge advertisers to place ads on your site). However, it is never easy to monetise something that sits on top of a free service. Maintaining and increasing the value proposition is a daily challenge. Free trials may be the key as they demonstrate respect for the users, as well as confidence in the value that the service provides.55

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SUMMARY Entrepreneurial marketing is different from marketing in established companies. Deep customer knowledge and insight that drive sales is more important than brand recognition because that is what investors look for. Developing a marketing concept, which has three important areas, should be a priority for an entrepreneur. One area is the formulation of a marketing philosophy. Some entrepreneurs are production-driven, others are sales-driven and still others are consumer-driven. The entrepreneur’s values and the market conditions will help determine this philosophy, but without doubt the consumer-driven philosophy has grounded more successes. A second area is market segmentation, which is the process of identifying a specific set of characteristics that differentiate one group of consumers from the rest. Demographic, benefit and psychographic variables are often used in this process. A third area is an understanding of consumer behaviour. Since many types and patterns of consumer behaviour exist, entrepreneurs need to focus on the personal and psychological characteristics of their customers. In this way they can determine a tailor-made, consumer-oriented strategy. This customer analysis focuses on such important factors as general buying trends in the marketplace, specific buying trends of targeted consumers and the types of goods and services being sold. Marketing planning is the process of determining a clear, comprehensive approach to the creation of customers. When developing this plan, the following elements are critical: marketing research, sales research, a marketing information system, sales forecasting, marketing plans and evaluation. Marketing research involves the gathering of information about a particular market, followed by analysis of that information. The marketing research process has five steps: define the purpose and objectives of the research, gather secondary data, gather primary data, develop an information-gathering instrument (if necessary) and interpret and report the information. Entrepreneurs do not carry out marketing research for four major reasons: cost, complexity of the undertaking, belief that only major strategic decisions need to be supported through marketing research, and belief that the data will be irrelevant to company operations. Usually they misunderstand the value of marketing research or fear its cost. Most emerging ventures go through the four marketing stages of entrepreneurial marketing, opportunistic marketing, responsive marketing and diversified marketing. Each stage requires a different strategy and the entrepreneur must adjust accordingly. Entrepreneurial marketing has to rely on smaller sample sizes and more data. The entrepreneur must adopt an entirely different approach to marketing. One such way is for the entrepreneur to build not only customer relationships and communities but also other stakeholder relationships to communicate the marketing message. The Internet is fast becoming the greatest marketing tool for entrepreneurs. It offers numerous benefits for the overall marketing strategy of a company, including brand recognition, information transfer and customer services. Social media and mobile marketing also open up new ways of co-creating products and building or contributing to communities. Entrepreneurs must come to grips with the concept of green marketing since the advent of the green economy coincides with the new global era of entrepreneurship. Entrepreneurial companies that do not live by a green standard will be financially damaged. Pricing strategies are a reflection of marketing research and must consider such factors as marketing competitiveness, consumer demand, life cycle of the goods or services being sold, costs and prevailing economic conditions. Today, Internet businesses are finding new pricing strategies that are fit for the medium.

KEY TERMS AND CONCEPTS affordable loss business model carbon footprint co-creation consumer characteristics consumer pricing consumer-driven philosophy customisation demand-oriented pricing

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Review key terms with interactive flashcards

durable competitive advantage ecological concern ecological fatalism entrepreneurial marketing entrepreneurial marketing plan experimentation family life cycle focus groups green marketing

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greenwashing Internet marketing life-cycle segment liquidity constraints loss leader pricing market market segmentation marketing concept marketing mix marketing philosophy marketing planning marketing research

mass customisation mobile marketing penetration persona pricing strategies primary data product-driven philosophy psychographics relationship intensity sales forecasting sales research sales-driven philosophy

secondary data segmentation variables skimming social media marketing surveys tipping point total customisation usage-based market segmentation viral marketing zero-budget marketing

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17

What are the differences between entrepreneurial marketing and ‘traditional’ marketing? What are the key constraints experienced by new and small businesses in marketing their products and services? In your own words, what is a market? How can marketing research help an entrepreneur identify a market? What are the five steps in the marketing research process? Briefly describe each. Which is of greater value to the entrepreneur: primary or secondary data? Why? How would an entrepreneur’s new-venture strategy differ under each of the following marketing philosophies: production-driven, sales-driven and consumer-driven? Be complete in your answer. In your own words, what is market segmentation? Give examples. What role do demographic and benefit variables play in the segmentation process? Identify and discuss three of the most important personal characteristics that help the entrepreneur identify and describe customers. Also, explain how the product life cycle will affect the purchasing behaviour of these consumers. How does the way that consumers view a venture’s product or service affect strategy? For example, why would it make a difference to the entrepreneur’s strategy if the consumers viewed the company as selling a convenience good as opposed to a luxury good? Provide a set of 10 market related questions that are typical to ask an entrepreneur that direct attention to gaps in market intelligence. Consider the areas of sales, distribution, markets, advertising and product. When developing a marketing plan, what are the five steps that are particularly helpful? Identify and describe each. Describe several different methods of Internet marketing. Give examples. Describe six segments of online shoppers by their online behavioural characteristics. There are three important distinctions to be drawn between social media marketing and traditional marketing. What are they and how do they differ? What are some of the major environmental factors that affect pricing strategies? What are some of the major psychological factors that affect pricing? Identify and discuss three of each. Name two forms of customisation and explain how customisation influences a pricing strategy.

EXPERIENCING ENTREPRENEURSHIP The 10 environmental world views In the box below are the 10 environmental world views identified by Environics’ Ecological Roadmap. 1 See if you can estimate the percentage of the US population that corresponds to the world view (answers are at end of the chapter).

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2 3

Estimate the same percentage for your own country or community. Identify where you personally fit on the spectrum. SEGMENT

WORLD VIEW IN BRIEF

1 Compassionate caretakers

Healthy families need a healthy environment.

2 Proud traditionalists

Religion and morality dictate actions in a world where humans are superior to nature.

3 Murky middles

Indifferent to most everything, including the environment.

4 Greenest Americans

Everything is connected, and our daily actions have an impact on the environment.

5 Anti-authoritarian materialists

Little can be done to protect the environment, so why not get a piece of the pie?

6 Driven independents

Protecting the earth is fine as long as it doesn’t get in the way of success.

7 Cruel worlders

Resentments and isolation leave no room for environmental concerns.

8 Borderline fatalists

Getting material and status needs met on a daily basis trumps worries about the planet.

9 Ungreens

Environmental degradation and pollution are inevitable in maintaining prosperity.

10 Post-modern idealists

Green lifestyles are part of a new way of being.

Source: Adapted from ‘The ecological roadmap’, cited in Joel Makower with Cara Pike, Strategies for the green economy: Opportunities and challenges in the new world of business, US Green Building Council, ª 2008 and updated by Earthjustice, http://americanenvironics.com/blog/Re%20Green%20-%20The%20Ecological%20Roadmap.pdf

EXPERIENCING ENTREPRENEURSHIP Taking steps towards building a business plan The marketing piece of any business plan deserves careful scrutiny. Convincing savvy investors that a viable market exists, that sales projections are achievable and that the competition can be beaten is no easy trick. It requires real spadework. Entrepreneurial ventures have two major elements to consider with respect to marketing. The first is research and analysis. The second is planning. Gear your research and analysis towards identifying your target market, its size, relevant trends, and the share you expect to capture. Evaluate your competition and be sure to include defensible support for your sales projections. Your marketing plan, then, outlines how you plan to overcome your competitors and achieve your goals, with details regarding overall marketing strategy, pricing and promotion. If appropriate, identify the role of all relevant social media. Work through the list of points below to start building the details of your business plan. You can also find more tools for identifying your customer online. Customer value proposition Distribution channels Market Market access and entry Market research

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Market risks outline Pricing strategy Product description Product development plans Product risks outline

Product unique features Promotion Target market segments

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CASE STUDIES

Experience this activity online

CASE 10.1 Dealing with the competition Six months ago Yung-Chien Lou opened a small office supply store in Taipei. Yung-Chien sells a wide range of general office merchandise, including photocopying and typing paper, writing tablets, envelopes, writing instruments and computer diskettes, as well as a limited range of office desks, chairs and lamps. Several office supply stores in the local area are, in Yung-Chien’s opinion, competitors. In an effort to better understand the competition, Yung-Chien has visited four of these stores and pretended to be a customer so she could get information regarding their prices, product offerings and service. Each has a different strategy. For example, one of them sells strictly on price. It is the customer’s responsibility to pick up the merchandise and carry it away. Another relies heavily on service, including a 90-day credit plan for those purchasing equipment in excess of $500. This company’s prices are the highest of the four stores Yung-Chien visited. The other two stores use a combination of price and service strategies. Yung-Chien believes that in order to get her new venture off the ground she must develop a marketing strategy that helps her effectively compete with these other firms. Since her store is extremely small, Yung-Chien believes that a certain amount of marketing research could be of value. On the other hand, her budget is extremely limited and she is not sure how to collect the information. Yung-Chien believes that what she needs to do is develop a market niche that will be loyal to her. In this way, no matter how extensive the competition, she always will have a group of customers who buy from her. Yung-Chien also believes that the focus of this research has to be in two general directions. First, she has to find out what customers look for from an office supply store. How important is price? Service? Quality? Second, she has to determine the general strategy of each of her major competitors so she can develop a plan of action for preventing them from taking away her customers. Right now, however, her biggest question is: How do I go about getting the information I need? QUESTIONS

1 2 3

Will the information Yung-Chien is seeking be of value to her in competing in this market? Why or why not? How would you recommend Yung-Chien put together her marketing research plan? What should be involved? Be as complete as possible in your answer. How expensive will it be for Yung-Chien to follow your recommendations for her marketing research plan? Describe any other marketing research efforts she could undertake in the near future that would be of minimal cost.

CASE 10.2 For cooks only When Phil Hartrack was a young man, he already knew what he wanted to be: a salesperson. His mother was delighted. ‘Salespeople make great money’, she explained to him, ‘and with your appetite, you’re going to need all of the money you can make. You’ve got the biggest appetite in the family.’ After graduating from university, Phil took a job with a consumer-goods firm. For the next 10 years, he was one of its leading salespeople every year. At the end of this time, however, Phil admitted to himself that although he enjoyed selling, what he really wanted to do was sell books. ‘I want to own my own bookstore’, he told his wife. ‘I know it sounds silly because I have had no experience in bookstore selling, but I’ve always loved books and I’m a terrific salesperson.’ After researching the market, Phil and his wife had to face a very important fact – the competition in this business is extremely aggressive. Most small bookstores do not last more than three years and the majors such as Dymocks are dominant in the industry. Phil refused to admit defeat. ‘There has to be a market niche somewhere in this field that the majors are not addressing. I’m going to find that niche and go after it’, he told his banker. Six months ago, Phil concluded that he had found this niche. ‘Cookbooks are the wave of the future’, he explained to his wife. ‘The average person today buys twice as many cookbooks as 10 years ago. It is the fastest-growing segment of the book market. Moreover, with your cooking skills and my appetite, we’re a natural for this market. We love food and we have sales skills.’ Taking all of their savings, Phil and his wife opened their bookstore in a popular suburban mall. It is called For Cooks Only and sells only cookbooks. By the end of the first month, the Hartracks realised they had made the right choice. Their

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wide selection of cookbooks and their familiarity with many of the books helped them build a loyal clientele. They even provide a ‘Recommended Recipe’ service, showcasing easy recipes that use foods in season. This service has resulted in many people coming by to look at a recipe – and then returning within a couple of weeks to buy the book. Although Phil is quite happy over the business’s success, he realises that his limited market niche could dry up in a short period of time. He feels that the best way to prevent this from happening is by expanding his distribution options by using the Internet and seeing if he can add any additional books or services to the line. His aim is to develop the strongest possible clientele loyalty. The first place to begin, in his opinion, is by examining the current purchasing habits of customers and then using this as a foundation for deciding where to go from here. QUESTIONS

1 2 3 4

From the customer’s viewpoint, what types of Internet services and options would be beneficial for the customer? Justify your answer in terms of the market opportunity. Why is Phil’s store doing so well? Include in your answer his philosophy of marketing. In his marketing research efforts, what type of information would you suggest Phil collect? How could adopting Internet strategies potentially change his marketing mix? Be complete in your answer.

CASE 10.3 The Cashew Case Part 2: So we have products but is there a market? (Note: This is Part 2 of a three part case featured in Chapters 2, 10 and 11. Please refer to the earlier chapters for further information) Mrs Villaviray observed that traditionally, the marketing system for locally grown cashew fruits has been focused on cashew nuts. The cashew farmers earn low income from their cashew trees. This is due to two major factors: (a) the low buying price of unprocessed nuts, and b) the non-utilisation of cashew apples for processing into commercially viable consumer products.56 Other marketing problems seemed to be a lack of market information, fluctuating prices and high transport cost. Aside from the cashew nut, Mrs Villaviray knew the ripe cashew apple could be eaten raw when freshly picked. The apple juice is very nutritious as it is very rich in vitamin C. The apple could also be processed into high value products such as wines, vinegar, beverages or syrup, jams and candies, juice and juice blends. Mrs Villaviray envisaged that four major products could be produced through her processing plant including: (a) roasted whole cashew kernels, (b) split cashew kernels, (c) cashew prunes (from the dried cashew apple), and (d) cashew wine. The roasted kernels could be produced in 200 g packs for retail and 20 kg packs for wholesale using plastic bags. The retail packs had to be properly labelled. For the cashew prunes, two types of packaging could be used, namely a 200 g pack in labelled plastic/styrofoam material and a 50 g pack using cellophane as wrapper. The cashew wine could be packed in recycled 375 ml glass bottles with proper labelling. The market outlets for the cashew products identified by the market study commissioned by Mrs Villaviray showed that the potential customers were restaurants, grocery stores, bus terminals and other customers from the province of Bataan and as far as Manila. Being CNSL (Cashew Nut Shell Liquid) free, the cashew kernel products, especially the whole cashew kernels, are considered to be of high quality. Now all Mrs Villaviray needed to do was put together a marketing plan. QUESTIONS

1 2 3

What positioning strategy would suit the different cashew products of Mrs Villaviray? Explain why you would adopt these approaches and how you might verify each product positioning. What options would Mrs Villaviray have to exploit the 4Cs in developing her marketing plan? How would you advise her to move forward with developing her plan? Be specific about the steps she will need to take. Does Mrs Villaviray have anything to fear from local competition? What could she do to avoid inviting competition from the local farmers? Source: Linking Farmers to Market: Some Success Stories from Asia-Pacific Region, Asia-Pacific Association of Agricultural Research Institutions (APAARI), FAO Regional Office for Asia and the Pacific, Bangkok, Thailand, May 2008. Copyright ª 2008 APAARI.

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ANSWERS TO ‘THE 10 ENVIRONMENTAL WORLD VIEWS’ 1 Compassionate caretakers

24

2 Proud traditionalists

20

3 Murky middles

17

4 Greenest Americans

9

5 Anti-authoritarian materialists

7

6 Driven independents

7

7 Cruel worlders

6

8 Borderline fatalists

5

9 Ungreens

3

10 Postmodern idealists

3

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. carbon footprint consumer behaviour entrepreneurial marketing focus groups green marketing greenwashing guerrilla marketing 1

Internet marketing LOHAS market penetration market segmentation marketing planning marketing research psychographics

relationship marketing sales forecasting sales research segmentation skimming surveys

Although small firms and start-up businesses are not the same as big business, many lessons can be learned from the marketing literature for large corporations. Often entrepreneurs may be seeking to differentiate by creating a luxury good/ service or brand. One such article that provides useful insight into what an entrepreneur needs to consider in attempting

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2

3

to create a luxury or exclusive brand position is the article by Kevin Lane Keller (2009), ‘Managing the growth trade-off: Challenges and opportunities for luxury brands’ in Journal of Brand Management, 16(5/6), 290–301. Further work has also been done on this in the entrepreneurial context by Inkon (2013), ‘A study of luxuries, desires and purchase intentions: A comparative study between luxuries and imitations’ in the Academy of Entrepreneurship Journal, 9(13), pp. 63–77. Seek out both articles and discuss the implications for entrepreneurs. The article by Jos Bartels and Karen Hoogendam (2011), ‘The role of social identity and attitudes toward sustainability brands in buying behaviors for organic products’ in Journal of Brand Management, 18(9), 697–708, suggests that marketing of products (and perhaps services) that assume responsibility for environmental sustainability can benefit by adopting specific strategies. Discuss what these strategies are and the implications for how an entrepreneur may go about entering environmentally responsible products/services into a market. This chapter has emphasised relationship building with customers although there is some research that also highlights the long-term risks of such a strategy in business to business (B2B) marketing. Locate the article by William W. Hill (2010), ‘Information sharing with B2B customers the sellers’ double edge sword’ in Academy of Marketing Studies Journal, 14(1), 27–38 and explain the risks and benefits of B2B relationship marketing. How should an entrepreneur use these insights to mitigate the risks of a B2B marketing strategy?

ENDNOTES 1 Jeff Bezos, founder and CEO, Amazon, quoted in Forbes, http://www.forbes.com/ sites/johngreathouse/2013/04/30/5-timetested-success-tips-from-amazon-founderjeff-bezos. 2 Minet Schindehutte, Michael H. Morris & Leyland F. Pitt (2009). Rethinking marketing. Upper Saddle River, NJ: Pearson/Prentice Hall. 3 Corral de Zubielqui, G., Lindsay, N. & O’Connor, A. (2014). How product, operations, and marketing sources of ideas influence innovation and firm performance in Australian SMEs. International Journal of Innovation Management, 18(2). 4 For a discussion of markets, see Louis E. Boone & David L. Kurtz, Contemporary marketing (15th edn). Mason, OH: Cengage/South-Western, 2013; Philip Kotler & Gary Armstrong, Principles of marketing (14th edn). Upper Saddle River, NJ: Pearson/Prentice Hall, 2012; William M. Pride & O. C. Ferrell, Foundations of marketing (5th edn). Mason, OH: Cengage/South-Western, 2013. 5 Minet Schindehutte, Michael H. Morris & Akin Kocak. Understanding marketdriven behavior: The role of entrepreneurship. Journal of Small Business Management, 46(1) (2008), 4–26; and Jonas Dahlqvist & Johan Wiklund. Measuring the market newness of new ventures. Journal of Business Venturing, 27(2) (2012), 185–96. 6 Bret Golan. Achieving growth and responsiveness: Process management and market orientation in small firms. Journal of Small Business Management, 44(3) (2006), 369–85; and Michael Song, Tang

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Wang & Mark E. Parry. Do market information processes improve new venture performance? Journal of Business Venturing, 25(6) (2010), 556–68. 7 See Kraus, S., Harms, R. & Fink, M. (2010). Entrepreneurial marketing: Moving beyond marketing in new ventures. International Journal of Entrepreneurship and Innovation Management, 11(1), 19–34. 8 See Miles, M. P. & Darroch, J. (2006). Large firms, entrepreneurial marketing processes, and the cycle of competitive advantage. European Journal of Marketing, 40(5/6), 485–501. 9 Morris, M. H., Schindehutte, M. & LaForge, R. W. (2002). Entrepreneurial marketing: A construct for integrating emerging entrepreneurship and marketing perspectives. Journal of Marketing Theory & Practice, 10(4), Fall, 1; Hills, G. E., Hultman, C. M. & Miles, M. P. (2008). The evolution and development of entrepreneurial marketing. Journal of Small Business Management, 46(1), 99–112. 10 Gumpert, D. E. (2002). Burn your business plan! What investors really want from entrepreneurs. Needham, MA: Lauson Publishing, 121. 11 Bjerke, B. & Hultman, C. (2002). Entrepreneurial marketing: The growth of small firms in the new economic era. UK: Edward Elgar Publishing. 12 Webster, F. E. Jr. & Lusch, R. F. (2013). Elevating marketing: marketing is dead! Long live marketing! Journal of the Academy of Marketing Science, 41, 389–99.

13 Read, S., Dew, N., Sarasvathy, S. D., Song, M. & Wiltbank, R. (2009). Marketing under uncertainty: The logic of an effectual approach. Journal of Marketing, 73(3), 1–18. 14 Lassiter, J. III. (2003). Entrepreneurial marketing: Learning from high-potential ventures. Harvard Business School Publishing, reference: 9-803-036. See also Collinson, E. & Shaw, E. (2001). Entrepreneurial marketing – a historical perspective on development and practice. Management Decision, 39(9), 761; Stokes, D. (2000). Entrepreneurial marketing: A conceptualisation from qualitative research. Qualitative Market Research: An International Journal, 3(1), 47–54; Hill, J. & Wright, L. T. (2000). Defining the scope of entrepreneurial marketing: A qualitative approach. Journal of Enterprising Culture, 8(1), March, 23; Lodish, L. M., Morgan, H. L. & Kallianpur, A. (2001). Entrepreneurial marketing lessons from Wharton’s pioneering MBA course. New York: Wiley; Gruber, M. (2004). Marketing in new ventures: Theory and empirical evidence. Schmalenbach Business Review (Du¨sseldorf), 56(2), 164ff; Miles, M. P. & Darroch, J. (2006). Large firms, entrepreneurial marketing processes, and the cycle of competitive advantage. European Journal of Marketing, 40(5/6), 485–501; Hills, G. E., Hultman, C. M. & Miles, M. P. (2008). The evolution and development of entrepreneurial marketing. Journal of Small Business Management, 46(1), January 99–112; Moffit, T. & Chiagouris, L. (2008). What

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would Richard Branson do?’ Marketing Management, 17(3), May, 59–62. 15 See Lauterborn, R. (1990). New marketing litany: 4P’s passe; C-words take over. New York: Advertising Age. 16 For this discussion see Achrol, R. S. & Kotler, P. (2012). Frontiers of the marketing paradigm in the third millennium. Journal of the Academy of Marketing Science, 40, 35–52. 17 Minet Schindehutte, Michael H. Morris and Leyland F. Pitt (2009). Rethinking Marketing. Upper Saddle River, NJ: Pearson/Prentice Hall. 18 Rosenbaum, M. S. & Massiah, C. (2011). An expanded servicescape perspective. Journal of Service Management, 22(4), 471–90. 19 Marketing planning. Small Business Reports, April 1986, 68–72; and Philip Kotler & Kevin Lane Keller (2012). Marketing Management, 14th edn. Upper Saddle River, NJ: Pearson/Prentice Hall. 20 Marketing planning, Small Business Reports. April 1986, 70. 21 Shama, A. (1993). Marketing strategies during recession: A comparison of small and large firms. Journal of Small Business Management, July, 62–72; see also Cohen, B. & Winn, M. I. (2007). Marketing imperfections, opportunity, and sustainable entrepreneurship. Journal of Business Venturing, 22(1), January, 29–49. 22 Marketing planning, 71; see also Matanovich, T., Lilien, G. L. & Rangaswamy, A. (1999). Engineering the price-value relationship. Marketing Management, Spring, 48–53. 23 For some interesting examples of market segmentation, see: Abimbola, Temi, Myfanwy Trueman, Oriol Iglesias, Rusnah Muhamad, T. C. Melewar & Sharifah Faridah Syed Alwi. Segmentation and brand positioning for Islamic financial services. European Journal of Marketing, 46(7/8) (2012), 900–21; Batt, Peter J. & Aijun Liu. Consumer behaviour towards honey products in Western Australia. British Food Journal, 114(2) (2012), 285–97; Campbell, Colin, Carla Ferraro & Sean Sands. Segmenting consumer reactions to social network marketing. European Journal of Marketing (2014), 432–52; Cini, Francesca, Luigi Leone & Paola Passafaro. Promoting ecotourism among young people: A segmentation strategy. Environment and Behavior, 44(1) (2012), 87–106; Haverila, Matti J. Market segmentation in the cell phone market among adolescents and young adults. Asia Pacific Journal of Marketing and Logistics, 25(3) (2013), 346–68; Ho, Jason

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& Charles B. Weinberg. Segmenting consumers of pirated movies. Journal of Consumer Marketing, 28(4) (2011), 252–60; Li, Zhibin, Wei Wang, Chen Yang & David R. Ragland. Bicycle commuting market analysis using attitudinal market segmentation approach. Transportation Research Part A: Policy & Practice, 47 (2013), 56–68; Liu, Hong Bo, Breda McCarthy, Tingzhen Chen, Shu Guo & Xuguang Song. The Chinese wine market: A market segmentation study. Asia Pacific Journal of Marketing and Logistics, 26(3) (2014), 450–71; Ngai, Joann & Erin Cho. The young luxury consumers in China. Young Consumers, 13(3) (2012), 255–66; Nielsen, Karina. Approaches to seniors’ tourist behaviour. Tourism Review, 69(2) (2014), 111–21; Patsiotis, Athanasios G., Tim Hughes & Don J. Webber. Adopters and non-adopters of internet banking: A segmentation study. International Journal of Bank Marketing, 30(1) (2012), 20–42; Payaud, Marielle A. Marketing strategies at the bottom of the pyramid: Examples from Nestle´, Danone, and Procter & Gamble. Global Business & Organizational Excellence, 33(2) (2014), 51–63; Stanton, John L., James B. Wiley & Ferdinand F. Wirth. Who are the locavores? Journal of Consumer Marketing, 29(4) (2012), 248–61; Tsung-Chiung Wu, Liu ChyongRu & Yu Wan-chen. Segmenting indigenous tourists from a serious leisure perspective. Journal of Vacation Marketing, 18(1) (2012), 17–29; Vodenska, Maria. New marketing approaches and emerging tourism products. International Journal of Management Cases, 15(4) (2013), 122–32; Weinstein, Art. Handbook of market segmentation: Strategic targeting for business and technology firms. Routledge, 2013; Zhang, Lei & Yang Wu. Market segmentation and willingness to pay for green electricity among urban residents in China: The case of Jiangsu Province. Energy Policy, 51, (2012), 514–23. 24 Johnson, T. (2003). An empirical confirmation of wine-related lifestyle segments in the Australian wine market. International Journal of Wine Marketing, 15(1), 5–33. 25 Weaver, D. B. & Lawton, L. J. (2002). Overnight ecotourist market segmentation in the Gold Coast hinterland of Australia. Journal of Travel Research, 40(3), February, 270. 26 Achrol, R. S. & Kotler, P. (2012). Frontiers of the marketing paradigm in the third millennium. 27 Roy A. Lindberg & Theodore Cohn. (1986). The marketing book for growing

companies that want to excel. New York: Van Nostrand Reinhold, 80–1. 28 For a thorough presentation, see McDaniel, S. W. & Parasuraman, A. (1986). Practical guidelines for small business marketing research. Journal of Small Business Management, January, 1–7; see also R. Ganeshasundaram & N. Henley. The prevalence and usefulness of market research: An empirical investigation into ‘background’ versus ‘decision’ research. International Journal of Market Research, 48(5) (2006), 525–50; and Malte Brettel, Andreas Engelen, Thomas Mu¨ller & Oliver Schilke. Distribution, channel choice of new entrepreneurial ventures. Entrepreneurship Theory and Practice, 35(4) (2011), 683–708. Aaker, David A. Marketing research, 11th edn. Hoboken, NJ: John Wiley & Sons, 2013; Berghoff, Hartmut, Philip Scranton & Uwe Spiekermann. The rise of marketing and market research,1st edn. Worlds of Consumption. New York, NY: Palgrave Macmillan, 2012; Grover, Rajiv & Marco Vriens. The handbook of marketing research: Uses, misuses, and future advances. Thousand Oaks: Sage Publications, 2006; Kaden, Robert J. Guerrilla marketing research: Marketing research techniques that can help any business make more money. London; Philadelphia, PA: Kogan Page, 2006; Marder, Eric. The laws of choice: Predicting customer behavior. New York: Free Press, 1997; Silver, Lawrence S. & Bruce Wrenn. The essentials of marketing research, 3rd edn. New York: Routledge, 2013; Stevens, Robert E. The marketing research guide, 2nd edn. New York: Best Business Books, 2006. 29 Timothy M. Baye. Relationship marketing: A six-step guide for the business start-up. Small Business Forum (Spring 1995), 26–41; and William G. Zikmund & Barry J. Babin, Essentials of marketing research, 5th edn. Mason, OH: Cengage/South-Western, 2013; Hougaard, Søren & Mogens Bjerre. The relationship marketer rethinking strategic relationship marketing, 2nd edn. Berlin: Springer, 2009. SpringerLink. http://dx.doi.org/ 10.1007/978-3-642-03243-1; Payne, Adrian & Pennie Frow. Strategic customer management: Integrating relationship marketing and CRM. Cambridge, UK: Cambridge University Press, 2013; Schumann, Jan H. The impact of culture on relationship marketing in international services: A target group-specific analysis in the context of banking services, 1st edn. Gabler Research: Applied Marketing Science/Angewandte

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Marketingforschung. Wiesbaden: Gabler, 2009. SpringerLink. http://dx.doi.org/ 10.1007/978-3-8349-8379-4. 30 Interested students might wish to flip through the Journal of Business Research to see experimental design. Some interesting articles include: EllisChadwick, Fiona & Neil F. Doherty. Web advertising: The role of e-mail marketing. Journal of Business Research, 65(6) (2012), 843–8; Shaalan, Ahmed S., Jon Reast, Debra Johnson & Marwa E. Tourky. East meets west: Toward a theoretical model linking guanxi and relationship marketing. Journal of Business Research, 66(12) (2013), 2515–21; Singh, Gurpreet & Neha Singh. Viral marketing: Pitfall or windfall. Asia Pacific Journal of Research in Business Management, 3(11) (2012), 1–2; Singh, Gurpreet & Neha Singh. Green marketing and consumer behavior. Asia Pacific Journal of Research in Business Management, 4(4) (2013), 1-1; Berthon, P., Pitt, L. F. et al. (2003). Norms and power in marketing relationships – alternative theories and empirical evidence. Journal of Business Research, 56(9); Pracejus, J. W. & Olsen, G. D. (2004). The role of brand/cause fit in the effectiveness of cause-related marketing campaigns. Journal of Business Research, 57(6); Odekerken-Schroder, G., De Wulf, K. et al. (2003). Strengthening outcomes of retailer–consumer relationships – the dual impact of relationship marketing tactics and consumer personality. Journal of Business Research, 56(3); Armstrong, J. S. (2003). The value of surprising findings for research on marketing. Journal of Business Research, 56(1); Fry, M. L. & Polonsky, M. J. (2004). Examining the unintended consequences of marketing. Journal of Business Research, 57(11). 31 McDaniel & Parasuraman, Practical guidelines, 5. 32 Melissa S. Barker, Donald I. Barker, Nicholas F. Borman & Krista E. Neher (2013). Social media marketing: A strategic approach. Mason, OH: SouthWestern/Cengage. 33 Schneider, G. P. (2009). Electronic commerce (8th edn). Cengage Learning, 187–91. 34 For a thorough review of social media and mobile marketing, see Barker et al., Social media marketing; and Mary Lou Roberts & Debra Zahay, Internet marketing: Integrating online and offline strategies. Mason, OH: South-Western/ Cengage, 2013. 35 National Australia Bank (2014). NAB Online Retail Sales Index: Indepth Report – April 2014. Available at http:// business.nab.com.au/wp-content/uploads/

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2014/06/NORSI-April-2014_v4_FINAL.pdf, accessed 4 June 2014. 36 Barker et al., Social media marketing. 37 Minet Schindehutte, Michael H. Morris & Leyland F. Pitt. Rethinking marketing. 38 Roberts & Zahay. Internet marketing; Barker et al. Social media marketing. 39 Barker et al. Social media marketing. 40 See Grant, J. (2008). The green marketing manifesto. Chichester, John Wiley & Sons; Grimmer, Martin & Meghann Woolley. Green marketing messages and consumers’ purchase intentions: Promoting personal versus environmental benefits. Journal of Marketing Communications, 20(4) (2014), 231–50; Lee, Seonjeong & Haemoon Oh. Effective communication strategies for hotel guests’ green behavior. Cornell Hospitality Quarterly, 55(1) (2014), 52–63; Lu, Leslie, Dora Bock & Mathew Joseph. Green marketing: What the millennials buy. Journal of Business Strategy, 34(6) (2013), 3–10; Ottman, Jacquelyn A. Green marketing: Opportunity for innovation, 2nd edn. Lincolnwood, IL: NTC Business Books, 1998; Ottman, Jacquelyn A. Green marketing. Lincolnwood, IL: NTC Business Books, 1993; Ottman, Jacquelyn. The new rules of green marketing: Strategies, tools, and inspiration for sustainable branding. Berrett-Koehler Publishers, 2011; Padhy, Prabir Chandra. Green marketing: A strategy for promoting eco-friendly products. ASBM Journal of Management, 6(1) (2013), 56–60; Rettie, Ruth, Kevin Burchell & Chris Barnham. Social normalisation: Using marketing to make green normal. Journal of Consumer Behaviour, 13(1) (2014), 9–17; Sheehan, Kim & Lucy Atkinson. Revisiting green advertising and the reluctant consumer. Journal of Advertising, 41(4) (2012), 5–7; Singh, Gurpreet & Neha Singh. Green marketing and consumer behavior. Asia Pacific Journal of Research in Business Management 4(4) (2013), 1–1. 41 TechTarget SearchCRM.com, Greenwashing, http:// searchcrm.techtarget.com/definition/ greenwashing. 42 Er, A. C., Sivapalan, S., Abd. Rahim, M. N., Toriman, M. E., Adam, J. H. & Buang, A. (2011). Ecotourism: Precepts and critical success factors, World Applied Sciences Journal, 13(SDISEP), 110–13. 43 Paull, John (2009). The value of ecolabelling. VDM Verlag; Ward, Trevor (2008). Seafood ecolabelling. WileyBlackwell; Rubik, Frieder (2005). The future of eco-labelling. Greenleaf Publishing. 44 Non-GMO trumps organic as factor for brand choice. Nutraceuticals World,

17(3) (2014), 8–8; Posegga, Oliver, Mattha¨us Paul Zylka, Johannes Putzke, Kai Fischbach & Detlef Schoder. Understanding the lifestyle of health and sustainability – an exploratory study. International Journal of Organisational Design and Engineering, 3(3–4) (2014), 338–57; 2014 Market LOHAS MamboTrack Natural & Organic Consumer Market Research Study, http:// www.marketlohas.com/consumeroutlook-survey-2014.html. 45 Denault, J-F. (2014). How much do environmental attributes influence purchasing patterns? Marketing Magazine Blog, http://www.marketingmag.com.au/ blogs/how-much-do-environmentalattributes-influence-purchasing-patterns53136/?utm_content¼buffer5a86f& utm_medium¼social&utm_source¼ plus.google.com&utm_campaign¼ buffer#.U5C6IU1OXZ5, accessed 5 June 2014. 46 World Business Council for Sustainable Development. Sustainable consumption: Facts and trends from a business perspective, http:// www.wbcsd.org. 47 Ginsberg, J. M. & Bloom, P. N. (2004). Choosing the right green marketing strategy. MIT Sloan Management Review, Fall, 79–84. 48 Murad, K. & N. Ramlee. 20 cents worth safeguarding climate change? Stimulating consumer-awareness towards ‘No Plastic Bag’ campaign. In 2012 IEEE Symposium on Business, Engineering and Industrial Applications (ISBEIA 2012). Piscataway, NJ; Bandung, Indonesia. 49 Higham, James E. S. & Scott A. Cohen. Canary in the coalmine: Norwegian attitudes towards climate change and extreme long-haul air travel to Aotearoa/New Zealand. Tourism Management, 32(1) (2011), 98–105. 50 Denault, J-F. (2014). How much do environmental attributes influence purchasing patterns? 51 American Environics, Road map for a health justice majority, http:// stonehousesummit.com/sites/default/files/ papers/American%20Environics%20%20Earthjustice%20Roadmap%20to% 20an%20Ecological%20Majority.pdf. 52 Makower, J. with Pike, C. (2008). Strategies for the green economy: Opportunities and challenges in the new world of business. US Green Building Council. 53 McCready, G. B. (1982). Marketing tactics: Master guide for small business. NJ: Prentice-Hall, 79. 54 Hong, Y., Liao, H., Sturman, M.C. & Zhou, Y. (2013). Competing through

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customization: Using human resource management to create strategic capabilities. Organizational Psychology Review, DOI: 10.1177/2041386613504608, accessed 6 June 2014.

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55 Jun Loayza (2009). 5 business models for social media start ups. Mashable Business, 14 July 2009, http:// mashable.com/2009/07/14/socialmediabusiness-models.

56 Equina, E. B. (1996). Enterprise development and processing of cashew food products. Paper presented during the symposium on cashew. NAPHIRE, Munoz, Nueva Ecija, Philippines.

» CHAPTER ELEVEN STRATEGIC ENTREPRENEURIAL GROWTH CHAPTER OBJECTIVES

1 I have often heard it said that big companies, the corporate giants, are the ones that need to think about their business strategically. Smaller, more entrepreneurial companies, by contrast, do not need strategy; they can pursue other routes to business success. In my view, that is exactly backward. Unlike the giants, small businesses cannot rely on the inertia of the marketplace for their survival. Nor can they succeed on brute force, throwing resources at problems. On the contrary, they have to see their competitive environment with particular clarity and they have to stake out and protect a position they can defend. That is what strategy is all about. Michael E. Porter, Harvard Business School

To introduce strategic design for an entrepreneurial venture

2 To discuss some of the reasons why entrepreneurs do not carry out strategic planning 3 To outline entrepreneurial strategy development and some of the benefits of strategic planning 4 To examine the transition that occurs in the movement from an entrepreneurial style to a managerial approach 5 To discuss the five stages of a typical venture life cycle – development, start-up, growth, stabilisation and innovation or decline 6 To identify key management issues occurring during the growth stages 7 To introduce the steps useful for breaking through the growth wall 8 To identify the unique managerial concerns with a growth business 9 To elaborate the concept of entrepreneurial leadership 10 To outline ways to incorporate sustainability into business strategy

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UNCERTAINTY AND GROWTH: KEY STRATEGIC DRIVERS Although most entrepreneurs do some form of planning for their ventures, it often tends to be informal and unsystematic.1 The actual need for systematic strategic planning will vary with the nature and structure of the business, but not necessarily its size. Traditionally, a two-person business was able to use informal processes, but nowadays even small firms face bewildering complexity, especially in relation to their online markets and communication. Nonetheless, an emerging venture that is rapidly expanding with constant increases in personnel and market operations will face the need to formalise its strategy process. An entrepreneur’s strategic style is also likely to shift from an informal to a formal and systematic approach for other reasons. First, there’s the degree of uncertainty within which the venture is attempting to become established and to grow. With greater levels of uncertainty, entrepreneurs need to hold a more responsive and adaptive strategic approach to help shape the business model. As uncertainty declines a more planned strategic development is likely to be more useful (although strategic flexibility should not be discounted or rejected). Second, the strength of competition (in both numbers and quality of competitors) will add to the importance of a more planned strategic approach in order for a new venture to monitor its operations and objectives closely vis-a`-vis the competition.2 Finally, the amount and type of experience the entrepreneur has will grow and influence the extent of formal strategic planning. A lack of adequate experience, either technological or business, may constrain the entrepreneur to informal and ad hoc strategising, but as experience grows the use of a formal strategy process will help to determine future paths for the organisation. As the world evolves and develops, entrepreneurial strategy is also in need of an urgent makeover in the new age. Sustainability must be integrated into the strategy of an entrepreneurial company from the beginning. Sustainable development demands that the needs of the present generation be fulfilled in such a way that future generations will also be able to meet their needs. This requires interrelated technological, cultural, organisational and institutional strategies.

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ENTREPRENEURIAL STRATEGY DESIGN AND PLANNING Entrepreneurial strategy involves the formulation of long-range plans for the effective management of opportunities and threats in light of a venture’s strengths and weaknesses. Adapting a definition for strategy from renowned strategy authors Mintzberg and Quinn to the entrepreneurial context, an entrepreneurial strategy may be defined as: a design or plan that integrates an entrepreneurial team’s intent into goals, policies and action sequences to build a cohesive business model. A well-formulated strategy helps to marshal and recruit resources, complement team competencies, compensate for relative shortcomings, anticipate changes in the environment and contingent moves by intelligent opponents, and to form an organisation with a unique and viable posture.3

Entrepreneurial strategy-making includes defining the venture’s vision, mission and strategic intent, specifying achievable objectives, comprehending the complexities within a business model and the market and industry setting within which the business will operate. Dynamic in nature, the strategic management process (Figure 11.1) is the full set of commitments, decisions and actions required for a business to achieve competitive advantage and earn above-average returns. It requires developing strategies and setting policy guidelines. Relevant strategic inputs derived from analyses of the opportunity in the context of the internal and external dynamic environments are necessary for

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372 Part 3: Developing entrepreneurial ventures

FIGURE 11.1 THE ENTREPRENEURIAL STRATEGY PROCESS

Business model conceptualisation

Strategy formulation External environment

Vision

Value Proposition

Strategic intent

Mission

Business model and resource configuration

Internal environment

Strategy execution Strategy evaluation Competitive advantage at above-average returns

Market actions

Engagement actions

Boundary actions

effective strategy formulation and implementation. In turn, effective strategic actions are a prerequisite for achieving desired outcomes. Therefore, the entrepreneurial strategy process (as distinct from a corporate strategic sequential management process) is continuously cyclic and used to match the conditions of an ever-changing market and competitive structure with a new firm’s opportunity and continuously evolving resources, capabilities and core competencies (the sources of strategic inputs). Effective strategic actions that take place in the context of carefully integrated strategy formulation and implementation actions result in desired strategic outcomes.4 Strategy development is the primary step in determining the future direction of a business. The ‘best’ strategic plan will be influenced by many factors, among them the abilities of the entrepreneur, the complexity of the venture and the nature of the industry. Yet, whatever the specific situation, five basic steps must occur in strategic planning and these are outlined below. 1 Examine the internal and external environments of the venture (strengths, weaknesses, opportunities, threats). 2 Formulate and define the venture’s long-range and short-range strategies (vision, mission, strategic intent, objectives, business model design, tactics, budgets and policies). 3 Implement the strategic plan (programs of recruitment to acquire resources and capabilities, engage in market entry activities, develop procedures, alliances, partnerships, supplier relationships, etc.). 4 Evaluate the performance of the strategy against strategic intent and desired returns. 5 Take follow-up action through continuous feedback. Figure 11.1 illustrates these basic steps in a flow diagram.5

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The first step – examining the environment – can be one of the most critical for an emerging venture. In Chapter 9, many of the external environment analysis tools were discussed. In this chapter we focus more on the internal assessment and developing the business model. Analyses of the external and internal environments provide the information required to develop the vision and mission. At the same time it is essential to keep the value proposition to the customer at the centre of this analysis – a vision and mission must be relevant and be valuable to a group of target customers. Now you are in good shape to state a strategic intent that communicates the value the business creates by its very existence and defines what the business will excel at. The statement of strategic intent is a key communication tool for the venture and plays an important role in stabilising the business and providing focus on the reason the new venture exists. The strategic intent also influences the design of the business model (discussed later), and defines the set of actions relating to securing a market position, obtaining or recruiting resources, and setting the boundaries for what the firm will do and what relationships it will need for the things that it will not do in terms of producing the goods and services for a customer. Through these decisions, the objective is to define a competitive advantage, or put another way, the unique position that the business will occupy in its marketplace. Look at the Entrepreneurship in Practice ‘Creative destruction in the sharing economy: disruptive business strategies’ for examples of value-creating disruptive ventures. A succinct review of the internal and external factors that influence the opportunity and hence the viability of a venture is called a SWOT analysis; SWOT is an acronym for a venture’s internal strengths and weaknesses and its external opportunities and threats (learn more about this through the TOWS Matrix exercise at the end of the chapter). The analysis should include not only the external factors most likely to occur and have a serious impact on the opportunity and the company, but also the internal factors most likely to affect the implementation of present and future strategic decisions. By focusing on this analysis, an emerging venture can proceed through the other steps of formulation, execution, evaluation and feedback (see Figure 11.1).6 The greatest value of the strategic planning process is the strategic thinking it promotes among business owners. Although not always articulated formally, strategic thinking synthesises the intuition and creativity of an entrepreneur into a vision for the future.7

CREATIVE DESTRUCTION IN THE SHARING ECONOMY: TRANSFORMING THE FOUNDATIONS TO DISRUPT THE INDUSTRY

ENTREPRENEURSHIP

Opportunities are at the fingertips of your phone these days, or maybe in your Google glasses. Barriers of entry have dropped. This goes beyond selling your grandmother’s porcelain figurines IN PRACTICE on eBay. Like the extra room in your apartment, which you could rent out on Airbnb. Like the back seat of your car, which is empty approximately 99 per cent of the time – but which, as it happens, someone might pay to sit in. Like the two extra seats at your dining room table every night that you could use to host visitors. This is called the peer-to-peer or the sharing economy, all built around the sharing of human and physical resources. It means you can find a place to stay, in some faraway city, that isn’t a hotel; a place to eat that’s not a restaurant; you can catch a ride with someone who is not a licensed taxi driver. The following four companies, Airbnb, EatWith, Lyft and Car Next Door are creative destruction in action. A new technology gets repurposed. Progress happens through disruption of existing industries and the creation of new industries.

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Airbnb Nathan Blecharczyk of Airbnb started writing code when he was a kid; he studied computer science at Harvard. And he helped start Airbnb with his friends Brian Chesky and Joe Gebbia. Airbnb was started and inspired by an event that happened in 2007. Back then, the three of us, Joe, Brian and myself, were roommates. And the rent on our apartment was raised 25 percent. And I decided to move out. The other two guys did not have enough money to pay for the rent, but they’re both designers. And they saw that an international design conference was coming to San Francisco and that all the hotels were sold out. So they got this idea to rent out the extra bedroom to designers who needed a place to stay. And that weekend they hosted three designers and they made over $1,000, thus allowing them to pay rent. And thus was born a business idea. On any given night in 2014, roughly 350 000 people are staying on Airbnb. They now have 800 000 properties in 192 countries, 35 000 different cities. They’re not a big hotel chain. Airbnb doesn’t own any hotels. Nor does it have to hire housekeepers or bellhops. Look at Kalish’s theory of gap-filling in Chapter 4 (page 119). Airbnb just plugs the gap between suppliers and customer. All they are really, are cloud-based platforms that establish a market between individuals. They just open the spigot and let the water flow downhill. They let supply find demand. EatWith EatWith is the Airbnb for restaurants. Private citizens invite people into their homes and their apartments and people come in, and they eat – and they pay – for a restaurant experience in somebody’s home. Guy Michlin, the CEO and cofounder of EatWith, got the idea while on vacation: I was traveling with my wife to the island of Crete. And like many times when you travel we fell into every possible tourist trap. I remembered that I once met in a conference a guy from Crete and I emailed and asked him, ‘where do the locals eat?’ And instead of just giving me a typical restaurant he invited me home to a Friday dinner with his family, which turned out to be by far the best thing that happened to us on this trip. . .. I think that by interacting with the locals, by staying with the locals, by eating with the locals. . . it just changes your whole experience. . . You don’t feel like a tourist any more. You feel almost like a local for a few days. . . And so when I went back home, I met with my cofounder and we said there has to be a way to replicate this magic and to share it with other people around the world. And that’s what we did. Lyft Lyft and Uber take this into the transportation realm. They are basically a ridesharing system using a smartphone application to connect passengers with drivers of vehicles for hire, whereby customers use the app to request rides and track their reserved vehicle’s location. John Zimmer, cofounder and president at Lyft, says: Lyft was born out of the idea that transportation is really inefficient today and you can see that in the fact that 80 percent of seats are empty at all times. . . So Lyft is now in over 65 different cities across the country. We’ve done over 10 million rides. And it’s a peer-to-peer network for people in your community to give each other rides in a safe way. We use a mobile application to connect drivers and passengers who have extra time or extra seats in their car to give rides at the lowest possible price point. I thought well, if we could build the next infrastructure and it would require nothing physical, and it was only information based, people that have cars, or who have seats, or are giving rides to people that need a ride, that would be incredible. We would solve for the economic, the environmental, and the social problems associated with this transportation system we’ve built. Car Next Door Another example of this ‘collaborative consumption’ business model is the first-in-Australia start-up called Car Next Door. It’s all about peer-to-peer car rental. That means that people can rent their neighbours’ vehicles. The company’s cofounder Will Davies, a former mortgage broker who ‘broke out’ to start his own businesses says ‘I couldn’t reconcile carbon reduction with mortgage broking . . . I had been researching ideas for a long time, and one of my ideas was that it could become big’. Not only does his business aim to cut carbon emissions and take cars off the road but also promote neighbourliness. Yes, the cars do emit CO2, but Car Next Door buys carbon offsets for the kilometres that are driven. Like the other companies above, Car Next Door taps into the excess capacity factor, namely that most people’s cont.

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cars just sit around not being used and could be ‘monetised’ in those periods when the car is not needed. (Most people use their expensive piece only 1.5 hours per day.) ‘Technology is now at such a point that you can make this all seamless. Through the Internet and the device we put into the car that enables people to get into it with a swipe card, you don’t need to meet your renters.’ Car owners choose the rate for which they lease out their car and receive up to 75 per cent of the rental proceeds, resulting in $2000–$10 000 per year for the typical owner. Sources: Adapted from ‘Freakonomics, regulate this! Full transcript’, http://freakonomics.com/2014/09/04/regulate-this-full-transcript; Hasham, Nicole (2012), ‘Love thy neighbour’s car . . . or just rent it‘, Sydney Morning Herald, 6 October 2012, http://www.drive.com.au/motornews/love-thy-neighbours-car–or-just-rent-it-20121005-274mb.html; Botsman, Rachel & Rogers, Roo (2010), What’s mine is yours: The rise of collaborative consumption, HarperCollins Publishers, New York, see also http://rachelbotsman.com; and author research.

THE LACK OF STRATEGIC PLANNING The importance of new ventures to the economy is substantial in terms of innovation, employment and wealth created, and effective planning can help these new companies survive and grow. Unfortunately, research has shown a distinct lack of strategic planning on the part of new ventures. Five reasons for this deficiency have been found. 1 Time scarcity: Managers report that their time is scarce and difficult to allocate to strategic planning in the face of day-to-day operating schedules. 2 Lack of knowledge: Small firm owners/managers have minimal exposure to and knowledge of the planning process. They are uncertain of the components of the process and the sequence of those components. The entrepreneurs are also unfamiliar with many planning information sources and how they can be used. 3 Lack of expertise/skills: Small-business managers typically are generalists and they often lack the specialised expertise necessary for the planning process. 4 Lack of trust and openness: Small firm owners/managers are highly sensitive and guarded about their businesses and the decisions that affect them. Consequently, they are hesitant to formulate a strategic plan that requires participation by employees or outside consultants. 5 Perception of high cost: Small-business owners perceive the cost associated with planning to be very high. This fear of expensive planning causes many business owners to avoid or ignore planning as a viable process.8 Other factors have been reported as difficulties of the planning process. For example, both highperforming and low-performing small ventures have problems with long-range planning. Both time and expense are major obstacles. Additionally, low-performing firms report that a poor planning context, inexperienced managers and unfavourable economic conditions are problems. Clearly, strategic planning is no easy chore for new ventures. On the other hand many benefits can be gained from such planning.

THE VALUE OF STRATEGIC PLANNING Does strategic planning pay off? Research shows it does. A number of studies have focused on the impact of planning on entrepreneurial businesses.9 These studies support the contention that strategic planning is valuable; indeed it influences a venture’s survival. Lack of planning is one of the top reasons for small business failures;10 firms engaged in strategic planning outperformed those that did not use such planning.11 In Australian small and medium enterprises (SMEs), strategic thinking and action seem to be undertaken through the use of a written business plan as a strategic framework; however, few other sophisticated strategy making techniques appear to be employed.12 A study of 220

On CourseMate Express read about Abdul’s phone repair shop. What strategic advice would you give this Malaysian electronic entrepreneur?

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small companies further established the importance of selecting an appropriate strategy (niche strategy) for a venture to build distinctive competence and a sustainable competitive advantage.13 In summary, all of the research indicates that emerging companies that engage in strategic planning are more effective than those that do not. Most importantly, the studies emphasise the significance of the planning process, rather than merely the plans, as a key to successful performance.14

Fatal flaws in strategic execution On CourseMate Express read about how the restaurant-preneur confronts the need for a strategic plan. Do you agree with her banker?

The actual execution of a strategy is as important as the strategy itself. Many entrepreneurs make unintentional errors while applying a specific strategy to their own specific venture. Competitive situations differ and the particular application of known strategies must be tailored to those unique situations. Porter has noted five fatal strategic flaws (FSFs) entrepreneurs continually fall prey to in their attempt to implement a strategy.15 Here are these mistakes and an explanation of them. FSF 1: Misunderstanding industry attractiveness. Too many entrepreneurs associate attractive industries with those that are growing the fastest, appear to be glamorous or use the fanciest technology. This is wrong, because attractive industries have high barriers to entry and the fewest substitutes. The more high-tech or high-glamour a business is, the more likely a lot of new competitors will enter and make it unprofitable. FSF 2: No real competitive advantage. Some entrepreneurs merely copy or imitate the strategy of their competitors. That may be an easy tactic and it is certainly less risky, but it means an entrepreneur has no competitive advantage. To succeed, ultimately new ventures must develop unique ways to compete. FSF 3: Pursuing an unattainable competitive position. Many aggressive entrepreneurs pursue a position of dominance in a fast-growing industry. However, they are so busy getting off the ground and finding people to buy their products that they forget what will happen if the venture succeeds. For example, a successful software program will be imitated quickly. So the advantage it alone gives cannot be sustained. Real competitive advantage in software comes from servicing and supporting buyers, providing regular upgrades and getting a company online with customers so their computer departments depend on the organisation. That creates barriers to entry. Sometimes, small companies simply cannot sustain an advantage. FSF 4: Compromising strategy for growth. A careful balance must exist between growth and the competitive strategy that makes a new venture successful. If an entrepreneur sacrifices their venture’s unique strategy in order to have fast growth, then the venture may grow out of business. Although fast growth can be tempting in certain industries it is imperative that entrepreneurs maintain and grow their strategic advantage as well. FSF 5: Failure to explicitly communicate the venture’s strategy to employees. It is essential for every entrepreneur to clearly communicate the company’s strategy to every employee. Never assume employees already know the strategy. Always be explicit. As Porter says: One of the fundamental benefits of developing a strategy is that it creates unity, or consistency of action, throughout a company. Every department in the organisation works toward the same objectives. But if people do not know what the objectives are, how can they work toward them? If they do not have a clear sense that low cost, say, is your ultimate aim, then all their day-to-day actions are not going to be reinforcing that goal. In any company, employees are making critical choices every minute. An explicit strategy will help them make the right ones.16

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Entrepreneurial and strategic actions Entrepreneurship and strategic management are both dynamic processes concerned with company performance. Strategic management calls for companies to establish and exploit competitive advantages within a particular environmental context. Entrepreneurship promotes the search for competitive advantages through product, process and market innovation. While strategic management for existing companies is concerned with managing the business model it has, entrepreneurship is focused on building an operable business model that has inherent competitive advantage and sufficient returns for those who invest in the new business. Researchers argue that entrepreneurial and strategic actions often are intended to secure new market or competitive space for the business to create wealth. As discussed in earlier chapters, entrepreneurial firms try to find fundamentally new ways of doing business that will disrupt an industry’s existing competitive rules, leading to the development of new business models that create new competitive business forms. The degree to which the firm acts entrepreneurially in terms of innovativeness, risk-taking and pro-activity is related to dimensions of strategic management. Specific domains that define the extent of wealth creation have been delineated from the commonalities of entrepreneurial and strategic actions. These domains are: innovation, networks, internationalisation, organisational learning, top management teams and governance, and growth (see Figure 11.2). Understanding the critical intersections of these specific domains allows entrepreneurs to increase their knowledge, which, in turn, leads to higher quality entrepreneurial and strategic actions.17

Entrepreneurial actions

• • • • •

Innovation Networks Internationalisation Organisational learning Top management teams and governance • Growth

FIGURE 11.2 THE INTEGRATION OF ENTREPRENEURIAL AND STRATEGIC ACTIONS

Strategic actions

Wealth creation Source: R. Duane Ireland, Michael A. Hitt, S. Michael Camp & Donald L. Sexton, ‘Integrating entrepreneurship and strategic management actions to create firm wealth’, Academy of Management Executive, 15(1), February 2001: 51. Published by Academy of Management, ª 2001.

Strategic positioning: the entrepreneurial edge Strategic competition can be thought of as the process of perceiving new positions that attract customers from established positions or draw new customers into the market. In principle, entrenched incumbents and new company entry entrepreneurs face the same challenges in finding new strategic positions. In practice, entrepreneurs often have the edge. Locating a strategic positioning is often not obvious and finding it requires creativity and insight. Entrepreneurs often discover unique positions that have been available, but simply

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overlooked by established competitors. In addition, entrepreneurial ventures can prosper by occupying a position that a competitor once held, but has ceded through years of imitation and straddling. Fundamental approaches to strategic positioning include establishing and defending a defensible position, leveraging resources to dominate a market and pursuing opportunities to establish new markets (see Table 11.1). Entrepreneurs must understand that the pursuit of opportunities provides the best choice for capitalising on change. TABLE 11.1

STRATEGIC APPROACHES – POSITION, LEVERAGE, OPPORTUNITIES

STRATEGIC LOGIC

ESTABLISH POSITION

LEVERAGE RESOURCES

PURSUE OPPORTUNITIES

Strategic steps

Identify an attractive market Locate a defensible position Fortify and defend

Establish a vision Build resources Leverage across markets

Jump into the confusion Keep moving Seize opportunities Finish strongly

Strategic question

Where should we be?

What should we be?

How should we proceed?

Source of advantage

Unique, valuable position with tightly integrated activity system

Unique, valuable, inimitable resources

Key processes and unique simple rules

Works best in

Slowly changing, well-structured markets

Moderately changing, wellstructured markets

Rapidly changing, ambiguous markets

Duration of advantage

Sustained

Sustained

Unpredictable

Risk

It will be too difficult to alter position as conditions change

Company will be too slow to build new resources as conditions change

Managers will be too tentative in executing on promising opportunities

Performance goal

Profitability

Long-term dominance

Growth

Source: Reprinted by permission of Harvard Business Review from Kathleen M. Eisenhardt & Donald N. Sull, ‘Strategy as simple rules’, January 2001: 109. Copyright ª 2001 by Harvard Business Publishing. Used by permission.

Most commonly, new positions open up because of change. New customer groups or purchase occasions arise, new needs emerge as societies evolve, new distribution channels appear, new technologies are developed and new machinery or information systems become available. When such changes happen, entrepreneurial ventures unencumbered by a long history in the industry can often more easily perceive the potential for a new way of competing. Unlike incumbents, these organisations can be more flexible because they face no trade-offs with their existing activities.18

DESIGNING THE BUSINESS MODEL The pace and magnitude of change will accelerate in the twenty-first century. It is critical that entrepreneurial businesses are able to evolve and transform to match this pace. The trend towards globalisation, the advent of new technology and the movement of information are all examples of forces that are causing companies to examine their culture, structure and systems for flexibility and adaptability. Innovation and entrepreneurial thinking are essential elements in the strategies of growing ventures. The task and challenge for an entrepreneur is to master the art of balancing mobile and dynamic factors19 while building and maintaining two sets of capabilities: dynamic capabilities, those capabilities that are concerned with the strategic development of the business to innovate and

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differentiate from competitors and adapt to changing competitive landscapes, and operational capabilities that attend to the management of the routine business operations.20 Two ways of building dynamic capabilities are internal (utilisation of the creativity and knowledge from employees) and external21 (the search for external competencies such as joint ventures and strategic alliances to complement the firm’s existing capabilities).22 An entrepreneur needs to design the business model that provides the blueprint for the acquisition and growth of capabilities to deliver a clear value proposition to the market at a cost and revenue equation that ensures the company’s survival and ongoing stakeholder support. Consistency and coherence across the business model is of paramount importance. Let’s clarify what we mean by ‘business model’. We believe that in practice a business model is the design of organisational structures to enact a commercial opportunity.23 Looking more deeply you find that three ways of viewing the businesses are embedded in the words business model.24 The base element is the economic perspective, which is concerned with the logic of profit from producing and/or delivering the good or service a company may offer. A second view is the operational perspective that considers the value-creating architecture of the company, the set of sequences, processes and activities that the business does. The third perspective adopts a strategic positioning market stance which views the company’s market positioning, interactions across organisational boundaries and growth opportunities. An entrepreneur needs to know the business model inside and out from each of these perspectives. At the heart of any good business model is the value proposition and this is the centrepiece for designing business growth strategies. The three perspectives are inter-related through nine components, described by Osterwalder25 and as illustrated in Figure 11.3. Also refer also to Chapter 16, page 591 for a discussion of the Business Model Canvas.

2 Customer segment The groups of customers a company identifies for its value offering

3 Customer relationships The information exchange links with customers that inform a company’s value offering

4 Distribution channels The means of transferring the value offering to the customer

Strategic positioning perspective

5 Revenue model The money a company acquires in exchange for its value offering

1 Value proposition The firm’s value offering that attracts customer and operational transactions

6 Cost structure The money a company spends to create and/or maintain its value offering

Economic perspective

7 Key resources Everything, other than money, that is used by the company to create the value offering

8 Partner network Those companies that a company selects to cooperate with to enable and create its value offering

9 Key activities The things a company does to utilise its resources in creating the value offer

Organisational architecture perspective

Source: Adapted from Osterwalder, A. (2004), ‘The business model ontology: A proposition in the Design Science Approach’, unpublished dissertation, University of Lausanne, p. 43, http://www.softwarepublico.gov.br/file/16725408/Ontologia-de-Modelo-de-Neg%C3%B3cio.pdf

FIGURE 11.3 NINE ELEMENTS AND THREE PERSPECTIVES OF THE BUSINESS MODEL

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FINE-TUNING A BUSINESS MODEL Here’s an example of give and take in a business model. John Spence, CEO of Karma Royal Group and Ernst and Young’s Australian Entrepreneur of the Year in 2010, tackled what may seem to some as a mature and saturated market with a business model that, after the fact, was found to be quite naive. Spence entered the global upmarket hotel business on the belief EDGE that there was an international market for holiday properties in India. Soon, it was apparent that there was sufficient wealth in India that turned the business model value proposition on its head and the company targeted sales in India. As market knowledge accumulated, a secondary market became obvious – Indian expatriates scattered across the globe – and in the 1990s more than 70 sales offices were set up across South-East Asia, Africa and Europe. Learning and experimentation didn’t stop there and listening to the market paid off. Similar properties were in demand but in other locations and the company started developing resorts in Indonesia and Thailand. Market experimentation does not come without some risks. Spence made mistakes along the way. In applying the same strategy to enter Bangladesh, recruiting an Indian to head up the team in Bangladesh proved to be a cultural affront to the market and this, combined with a poor sales office location, ultimately led to achieving no sales. However careful management meant the cost of this experiment was minimised to $50 000 and Spence learned good lessons about key points to consider when entering different international markets. Spence explains that entering South-East Asian markets is modelled on two key principles. First, roll out the proven business template. Second, hire in a local management team quickly. The company then provides its own training through its training division. The cultural differences throughout Asia (for example, India alone has 90 languages) means that each community is best served by a local team who respect the local culture. The infrastructure behind them though is rigorously developed and common to all jurisdictions. Maintaining culture is a key competitive weapon and the company works hard to maintain a young outlook to differentiate from the global competition with a boutique-styled offering. Without uniforms and conforming decor, employees are free to express their own way of doing things and the result is a culture that thrives on the ‘just do it’ attitude.

ENTREPRENEURIAL

Source: John Spence, ‘Strategic entrepreneurial growth’. Adapted from the ‘Karma Royal Group Case Study’, Asian Agenda Press, Ernst & Young. Published by Ernst & Young Global Limited, ª 2011. Available at http://www.ey.com.

DOES AN ENTREPRENEUR REALLY WANT TO BE A MANAGER? If an entrepreneur is to grow a business, a key transition will need to occur during the growth stage of a venture when the entrepreneur confronts the need to shift into becoming a manager. This is not easy to do, and sometimes you lose your entrepreneurial spirit, as important as managing a new business might be. Hofer and Charan have noted: Among the different transitions that are possible, probably the most difficult to achieve and also perhaps the most important for organisational development is that of moving from a one-person, entrepreneurially managed firm to one run by a functionally organised, professional management team.26

A number of problems can occur during this transition, especially if the enterprise is characterised by factors such as: (1) a highly centralised decision-making system, (2) an over-dependence on one or two key individuals, (3) an inadequate repertoire of managerial skills and training and (4) a paternalistic atmosphere.27 Although these characteristics are often effective in the new venture’s start-up and initial survival, they pose a threat to the company’s development during growth. Quite often, these characteristics detract from the entrepreneur’s ability to manage a venture’s growth successfully. From a strategic perspective, one problem with growing a business is you reach a point where you are compelled to manage rather than innovate. You want to exploit customers’ preferences and

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maximise their behaviour through revenue transactions – over and over again. Some entrepreneurs then shift to being a manager and never innovate again. Others become bored with managing and want to get out of it to create a new idea. Table 11.2 shows the differences between a managerial mind-set versus an entrepreneurial mind-set from the perspective of decision-making assumptions, values, beliefs and approaches to problems. These differences illustrate the changes in style and approach that confront an entrepreneur in transition. TABLE 11.2

THE MANAGERIAL VERSUS THE ENTREPRENEURIAL MIND-SET MANAGERIAL MIND-SET

ENTREPRENEURIAL MIND-SET

Decision-making assumptions

The past is the best predictor of the future. Most business decisions can be quantified. Keep milking the money.

A new idea or an insight from a unique experience is likely to provide the best estimate of emerging trends. Go after new, don’t stay with old.

Values

Decisions can be quantified. Rigorous analyses are highly valued for making critical decisions.

New insights and real-world experiences are more highly valued than results based on historical data.

Beliefs

Big data is good. Law of large numbers: chaos and uncertainty can be resolved by systematically analysing the right data.

Always watch the long tail. Law of small numbers: a single incident or several isolated incidents quickly become pivotal for making decisions regarding future trends.

Approach to problems

Problems represent an unfortunate turn of events that threaten financial projections. Problems must be resolved with substantiated analyses.

Problems represent an opportunity to detect emerging changes and possibly new business opportunities.

Source: Mike Wright, Robert E. Hoskisson & Lowell W. Busenitz, ‘Firm rebirth: Buyouts as facilitators of strategic growth and entrepreneurship’, Academy of Management Executive, 15(1), 2001: 114. Published by Academy of Management, ª 2001.

BALANCING THE FOCUS: ENTREPRENEURIAL VERSUS MANAGERIAL Although every company wants to be as innovative, flexible and creative as Apple, Google and Facebook, there are thousands of new restaurants, Internet businesses, retail stores and high-tech ventures that presumably have tried to be innovative, to grow and to show other characteristics that are entrepreneurial in the dynamic sense, but have failed. Remaining entrepreneurial while making the transition to some of the more administrative traits of managers is vital to the successful growth of a venture. At the two ends of the continuum (from entrepreneurial focus to administrative focus) are specific points of view. One study characterised these in question format. • The entrepreneur’s point of view: – Where is the opportunity? – How do I capitalise on it? – What resources do I need? – How do I gain control over them? – What structure is best? • The administrative point of view: – What resources do I control? – What structure determines our organisation’s relationship to its market? – How can I minimise the impact of others on my ability to perform? – What opportunity is appropriate?28

On CourseMate Express read about entrepreneurship versus administrative culture. Which do you want to be? See the differences.

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Existing products

New products

Existing markets

Market penetration

Product development

New markets

The logic behind the variance in the direction of these questions can be presented in a number of different ways. For example, the commitment of resources in the entrepreneurial frame of mind responds to changing environmental needs, whereas the managerial point of view is focused on the reduction of risk. In the control of resources, entrepreneurs will avoid ownership because of the risk of obsolescence and the need for more flexibility, whereas managers will view ownership as a means to accomplish efficiency and stability. In terms of structure, the entrepreneurial emphasis is placed on a need for flexibility and independence, whereas the administrative focus is placed on ensuring integration with a complexity of tasks, a desire for order and controlled reward systems. Saras Sarasvathy in her research and interviews with many entrepreneurs identified that entrepreneurs work with an effectual logic, creating, crafting and adapting ‘means’ to meet imagined new ‘ends’. She counterpoints the entrepreneur by two other types, the manager and the strategist. While managers, she argues, use causal reasoning working with given ‘means’ to achieve given ‘ends’, the strategist adopts creative causal reasoning, by shaping given ‘means’ and creating new ‘means’ to meet given ‘ends’.29 To illustrate this point we can develop the argument by adapting a recognised corporate strategy tool, called the Ansoff Product-Market Matrix30 (refer Figure 11.4) which plots the level of technology newness embedded in the product along the x axis and the level of market newness along the y axis. If we think about the types of reasoning that might be involved in operating in the different quadrants we can superimpose the type of logic or reasoning that might best be suited to exploiting the different quadrants.

Market extension

Diversification

FIGURE 11.4 THE PRODUCT-MARKET MATRIX

The effectual logic has its place in Ansoff’s Diversification quadrant. Here we are neither constrained by known products nor by known markets. Imagination, vision, confidence to sell, ambition and so on will be necessary to succeed. This is the world of entrepreneurial reasoning and effectual logic, imagining new possibilities (the ends) and arranging the resources (the means) to achieve them. As we consider the Product Development and Market Extension quadrants, constraints creep in with either the product or market. This influences the type of logic and reasoning that will be

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effective as the focus shifts to choosing among product and market options (or choosing and crafting different means). The objective end though is fixed to either move more of the known product into an unknown market or create new products to increase revenues from the existing market. These quadrants require higher levels of strategic logic and reasoning. In the Market Penetration quadrant, on the other hand, both the product and markets are known and the objective is to maximise sales within this combination of fixed means (product and market) to achieve a known end (higher revenues, sales or profits). This requires management logic and reasoning. Entrepreneurship of various types can originate in any quadrant, but over time any and every business will need, at different points in time, the service of these different forms of reasoning and logic. Herein lies two problems. First, the entrepreneur who may be well equipped with effectual logic to start an innovative new business may not be equally well equipped to manage the strategic and managerial reasoning as the business grows. Second, if the business successfully grows there is an increasing risk that progressively the effectual reasoning is squeezed out of the company and the company then is unable to exploit expansion opportunities with any combination of new products and markets. You may recall we discussed disruptive innovation in Chapter 6 which illustrated the innovation dilemma and how established firms have a propensity to overlook the new product and new market opportunities. Managing the journey of the firm as it encounters the various quadrants will require calling upon different rational and logic approaches. Each point of view – entrepreneurial, strategic and managerial – accounts for different considerations that need to be balanced across time if effective growth is going to be achieved.

Linking strategy to new products in new markets A major hindrance to the success of an entrepreneurial venture is the limited resources that may be available to take on competition in a hotly contested market. Strategy draws much of its language from wars and battles whereby the aim is to obliterate or expel an opponent. An entrepreneur though does not need to play this game and can instead be true to the pioneering spirit of new enterprise and target the conquest of market spaces not yet contested or remaining unidentified by competitors. Using effectual logic, an entrepreneur can carve out a unique and dominant market presence in spaces that precede the intrusion of competitors. This type of strategy has been coined Blue Ocean Strategy.31 Blue oceans are defined by Kim and Mauborgne as market spaces where industries do not exist today. They contrast these spaces with that of red oceans that are the tightly contested known markets that leave blood-soaked waters as competitors brutally contest for customers. Although it may sound strange to suggest that entrepreneurs should aim to establish a market presence where the market is as yet unknown, this is precisely what Cirque du Soleil did by redefining the circus experience and Casella wines did by launching their Yellowtail brand in the USA. The key to this strategy is to carve out a new market space not yet addressed by competitors. How is this done? Essentially it requires two critical insights. The first is a realisation that the current industry and/or market boundaries and conditions are not fixed and that you as an entrepreneur are not bound to play by the rules of the established market contestants. The second requires an acute awareness of how the value proposition experienced by a customer can be improved by redefining the current rules of the industry and market space and establishing your business to exploit these new conditions.

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Finding the blue ocean requires an entrepreneur to think of innovation through the lens of value or value innovation. Strategists often make the distinction between two fundamental types of strategy; seeking differentiation or establishing a low cost base. Thinking about value innovation causes one to not think of these two positions as either/or strategies but instead as a case where differentiation and low cost opportunities can be exploited as a principle strategy. Cirque du Soleil, for instance, differentiated their performances by incorporating elements of theatre and dance, constructing themed performances and making the musical score a fundamental and integrated part of the circus performance. At the same time they eliminated the costs of healthcare, transport, training and feeding of animals as part of the circus act and avoided the social backlash emerging from animal welfare issues. Instead of investing in hiring expensive star performers of the circus they redirected their investment to developing transfixing performances.

MANAGING ENTREPRENEURIAL GROWTH Managing entrepreneurial growth may be the most critical challenge for the future success of business enterprises. After initiation of a new venture, the entrepreneur needs to develop an understanding of management transition. As ventures grow, entrepreneurs must remember two important points. First, an adaptive firm needs to retain certain entrepreneurial characteristics in order to encourage innovation and creativity. Second, the entrepreneur needs to translate this spirit of innovation and creativity to their personnel while personally making a transition towards a more managerial style.32 Thus, the survival and growth of a new venture requires the entrepreneur to possess both strategic and tactical skills and abilities. Which specific skills and abilities are needed depends in part on the venture’s current development.

VENTURE DEVELOPMENT STAGES The traditional life cycle stages of an enterprise are presented in Figure 11.5. These stages include new-venture development, start-up activities, growth, stabilisation and innovation or decline. Other authors have described these stages in different terms that may range from four33 to six.34 In short, authors generally agree that ventures do experience a life cycle, although the number of stages may not always be agreed. Here we summarise five stages. By turning to the venture life-cycle exercise at FIGURE 11.5 A VENTURE’S TYPICAL LIFE CYCLE

Profit, productivity, revenues

Failure New-venture development

Start-up activities

Venture growth

Business stabilisation

Stages (number of years)

Innovation or decline

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the end of the chapter you can test your awareness of what the different stages will mean for an entrepreneur.

STAGE 1: NEW-VENTURE DEVELOPMENT The first stage, new-venture development, consists of activities associated with the initial formulation of the venture. This initial phase is the foundation of the entrepreneurial process and requires creativity and assessment. In addition to the accumulation and expansion of resources, this is a creativity, assessment and networking stage for initial entrepreneurial strategy formulation. The enterprise’s general philosophy, mission, scope and direction are determined during this stage.

STAGE 2: START-UP ACTIVITIES The second stage, start-up activities, encompasses the foundation work that would contribute to creating a formal business plan and includes searching for capital, carrying out marketing activities and developing an effective entrepreneurial team. These activities typically demand an aggressive entrepreneurial strategy with maximum effort devoted to launching the venture. It is typified by strategic and operational planning steps designed to identify the firm’s competitive advantage and to uncover funding sources. Marketing and financial considerations tend to be paramount during this stage as the business struggles with survival.35

STAGE 3: GROWTH STAGE The growth stage often requires major changes in entrepreneurial strategy. Competition and other market forces call for the reformulation of strategies. For example, some firms find themselves ‘growing out’ of business because they are unable to cope with the growth of their ventures. Highly creative entrepreneurs sometimes are unable, or unwilling, to meet the administrative challenges that accompany this growth stage. As a result, they leave the enterprise and move on to other ventures. This growth stage presents newer and more substantial problems than those the entrepreneur faced during the start-up stage.36 The growth stage is a transition from an entrepreneurial informal ‘one-person’ leadership to managerial formalised and team-oriented leadership. This transition for the entrepreneur, as discussed earlier, requires developing a different set of skills while maintaining an entrepreneurial perspective for the organisation.37

STAGE 4: BUSINESS STABILISATION The stabilisation stage is a result of both market conditions and the entrepreneur’s efforts. During this stage a number of developments commonly occur, including increased competition, consumer indifference to the entrepreneur’s good(s) or service(s) and saturation of the market with a host of ‘me too’ look-alikes. Sales often begin to stabilise and the entrepreneur must begin thinking about where the enterprise will go over the next three to five years. This stage is often a swing stage in that it precedes the period when the firm either swings into higher gear and greater profitability or swings towards decline and failure. During this stage, innovation is often critical to future success.

STAGE 5: INNOVATION OR DECLINE Companies that fail to innovate will die. Financially successful enterprises will often try to acquire other innovative firms, thereby ensuring their own growth. In addition, many companies will work on new product/service development in order to complement current offerings.

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All of a venture’s life cycle stages are important strategic points and each requires a different set of strategies. However, this chapter concentrates specifically on the growth stage since entrepreneurs need to manage strategy at this point the most. We will now examine the key factors affecting the ability to manage this stage.

ENTREPRENEURS DIRECTLY INFLUENCE GROWTH It has been noted that entrepreneurs: (1) perceive an opportunity, (2) pursue this opportunity and (3) believe that success of the ventures is possible.38 This belief is often due to the uniqueness of the idea, the strength of the product, or some special knowledge or skill the entrepreneur possesses. These same factors must be translated into the organisation itself as the venture grows. As was highlighted earlier, it is important for the growth-oriented entrepreneur to keep the entrepreneurial frame of mind and avoid the risk of stifling innovation that comes with a greater managerial responsibility. However, in some cases success will affect an entrepreneur’s willingness to change and innovate. This is particularly true when the entrepreneur is intent on creating an easier lifestyle choice. The person does not want to change and will want to maintain control emulating an organisational form known as an autocracy, where orders are issued from the top down and change initiated at the lower levels is not tolerated.39 As a result, no one in the venture is willing (or encouraged) to become innovative or entrepreneurial because the owner–founder stifles such activity. One study found that the entrepreneur directly affects the company’s growth orientation as measured by profitability goals, product/market goals, human resource goals and flexibility goals.40 If the entrepreneur hopes to maintain the creative juices that helped launch the venture in the first place, specific steps or measures therefore must be taken.

KEY MANAGEMENT ISSUES ENCOUNTERED DURING THE GROWTH STAGE The growth stage often signals the beginning of a metamorphosis from a personal venture to a group-structured operation. Domination by the lead entrepreneur gives way to a team approach biased heavily towards coordination and flexibility. Research has shown that new-venture managers experiencing growth, particularly in emerging industries, still need to adopt flexible, organic structures.41 Rigid, bureaucratic structures are best suited for mature, stabilised companies. Therefore, the cultural elements need to follow a flexible design of autonomy, risk taking and entrepreneurship. This type of culture reflects the entrepreneur’s original force that created the venture. However, entrepreneurs must understand several key and specific managerial issues that will become problematic during the growth stage. These issues include control, responsibility, staying the course towards building an adaptive firm and managing paradox.

CONTROL Growth creates problems in command and control. When dealing with them entrepreneurs need to answer three critical questions. Does the control system imply trust? Does the resource allocation system imply trust? Is it easier to ask permission than to ask forgiveness? These questions reveal a great deal about the control of a venture. If they are answered with ‘yes’, the venture is moving towards a good blend of control and participation. If they are answered with ‘no’, the reasons for each negative response should be closely examined.

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RESPONSIBILITY As the company grows, the distinction between authority and responsibility becomes more apparent. This is because authority can always be delegated, but it is most important to create a sense of responsibility. This action establishes flexibility, innovation and a supportive environment. People tend to look beyond the job alone if a sense of responsibility is developed, so the growth stage is better served by the innovative activity and shared responsibility of all of the firm’s members.

BUILDING THE ADAPTIVE BUSINESS An entrepreneurial company facing growth needs to remain flexible and adapt to the changing environment beyond start-up. Such an adaptive firm increases opportunity for its employees, initiates change and instils a desire to be innovative. Entrepreneurs can build an adaptive firm in several ways.42 The following are not inflexible rules, but they do enhance a venture’s chance of remaining adaptive and innovative both through and beyond the growth stage.

Share the entrepreneur’s vision The entrepreneur’s vision must be permeated throughout the organisation in order for employees to understand the company’s direction and share in the responsibility for its growth. The entrepreneur can communicate the vision directly to the employees through meetings, conversations or seminars. It also can be shared through symbolic events or activities such as social gatherings, recognition events and displays. Whatever the format, having shared vision allows the venture’s personnel to catch the dream and become an integral part of creating the future.43

Increase the perception of opportunity This can be accomplished with careful job design. The work should have defined objectives for which people will be responsible. Each level of the hierarchy should be kept informed of its role in producing the final output of the product or service. This is often known as staying close to the customer. Another way to increase the perception of opportunity is through a careful coordination and integration of the functional areas. This allows employees in different functional areas to work together as a cohesive whole.

Institutionalise change as the venture’s goal Planning, operations and implementation are all subject to continual changes as the venture moves through the growth stage and beyond. If opportunity is to be perceived among the market and industry dynamics, building an organisational preference for change rather than preservation of the status quo must not only be encouraged, but established as a goal. Within this context a desire for opportunity can exist if resources, people and structures for faster managerial response are made available and departmental barriers are reduced.

Instil the desire to be innovative The desire of personnel to pursue opportunity must be carefully nurtured. Words alone will not create an innovative setting.44 Specific steps such as the following should be taken. • A reward system: Explicit forms of recognition should be given to individuals who pursue innovative opportunities. For example, bonuses, awards, salary advances and promotions should be tied directly to the innovative attempts of personnel. • An environment that allows for failure: The fear of failure must be minimised by the general recognition that often many attempts are needed before a success is achieved. This does not

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imply that failure is sought or desired. However, learning from failure, as opposed to expecting punishment for it, is promoted. When this type of environment exists, people become willing to accept the challenge of change and innovation. Three distinct forms of failure should be distinguished: – Moral failure: This form of failure is a violation of internal trust. Since the company is based on mutual expectations and trust, this violation is a serious failure that can result in negative consequences. – Personal failure: This form of failure is brought about by a lack of skill or application. Usually responsibility for this form of failure is shared by the company and the individual. Normally, therefore, an attempt is made to remedy the situation in a mutually beneficial way. – Uncontrollable failure: This form of failure is caused by external factors and is the most difficult to prepare for or deal with. Resource limitations, strategic direction and market changes are examples of forces outside the control of employees. Top management must carefully analyse the context of this form of failure and work to prevent its recurrence. • Flexible operations: Flexibility creates the possibility of change taking place and having a positive effect. If a venture remains too rigidly tied to plans or strategies it will not be responsive to new technologies, customer changes or environmental shifts. Innovation will not take place because it will not ‘fit in’. • The development of venture teams: In order for the environment to foster innovation, venture teams and team performance goals need to be established. These must be not just work groups, but visionary, committed teams with the authority to create new directions, set new standards and challenge the status quo.45

MANAGING PARADOX AND CONTRADICTION When a venture experiences surges in growth, a number of structural factors also begin to present multiple challenges. These include cultural elements, staffing and development of personnel and appraisal and rewards. Entrepreneurs can constantly struggle over whether to organise these factors in a rigid, bureaucratic design or a flexible, organic design. When designing a flexible structure for high growth, entrepreneurs must realise that a number of contradictory forces are at work in certain other structural factors. Consider the following.

Bureaucratisation versus decentralisation Increased hiring stimulates bureaucracy. Companies formalise procedures as staffing doubles and triples. Employee participation and autonomy decline and internal labour markets develop. Tied to growth, however, is also an increased diversity in product offering. This favours less formalised decision processes, greater decentralisation and the recognition that the company’s existing human resources lack the necessary skills to manage the broadening portfolio.

Business environment versus strategy High turbulence in the business environment coupled with competitive conditions favour company cultures that support risk taking, autonomy and employee participation in decision making. Companies confront competitors, however, through strategies that depend on the design of formal systems that inhibit risk taking and autonomy.

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Strategic emphasis: quality versus cost versus innovation Rapidly growing firms strive to simultaneously control costs, enhance product quality and improve product offerings. Minimising costs and undercutting competitors’ product prices, however, are best achieved by traditional hierarchical systems of decision making and evaluations. Yet these strategies conflict with the kinds of autonomous processes most likely to encourage the pursuit of product quality and innovation.46 These factors emphasise the importance of managing paradox and contradiction. Growth involves the multiple challenges of: (1) the stresses and strains induced by attempts to control costs while simultaneously enhancing quality and creating new products to maintain competitive parity and (2) centralising to retain control while simultaneously decentralising to encourage the contributions of autonomous, self-managed professionals to the embryonic corporate culture. Rapidly growing firms are challenged to strike a balance among these multiple pulls when designing their managerial systems.

CONFRONTING THE GROWTH WALL In attempting to develop a managerial ability to deal with venture growth, many entrepreneurial owners confront a growth wall that seems too gigantic to overcome. Therefore, they are unable to begin the process of handling the challenges that growth brings about. Researchers have identified a number of fundamental changes that confront rapid-growth companies, including instant size increases, a sense of infallibility, internal turmoil and extraordinary resource needs. In addressing these changes that can build a growth wall, successful growth-oriented companies have exhibited a few consistent themes: • the entrepreneur is able to envision and anticipate the company as a larger entity • the team needed for tomorrow is hired and developed today • hierarchy is minimised • employees hold a financial stake in the company • the original core vision of the company is constantly and zealously reinforced. New ‘bigcompany’ processes are introduced gradually as supplements to, rather than replacements for, existing approaches.47 These themes are important for entrepreneurs to keep in mind as they develop their abilities to manage growth. One researcher found that internal constraints such as lack of growth capital, limited spans of control and loss of entrepreneurial vitality occur in growth firms that struggle to survive versus those that successfully achieve high growth. In addition, fundamental differences exist in the firms’ approach to environmental and contextual changes and trends.48 Therefore, a few key steps are recommended for breaking through the inability to handle environmental changes or trends. These include: creating a growth task force to organise and interpret the environmental data, to identify the venture’s strengths and weaknesses, to brainstorm new ideas that leverage the firm’s strengths and to recommend key ideas that should be developed further; planning for growth with strategies to resolve the stagnation, a set of potential results and identification of the necessary resources; maintaining a growth culture that encourages and rewards a growth-oriented attitude; and developing an outside board of advisers to become an integral part of the venture’s growth. This board should help determine, design and implement an organisational structure to enhance the desire for growth.49

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SUCCESSFUL COMPANIES DESIGN BLUEPRINTS FOR HIGH-TECH START-UPS The Stanford Project on Emerging Companies (SPEC) tracked a sample of 200 high-technology start-ups in California’s Silicon Valley over eight years. The goal was to discover how founders of these firms made key organisational and human resource (HR) decisions that supported their firm’s growth in the formative years. Through interviews with founders, chief executives and IN PRACTICE human resource directors and supplemental quantitative data on strategy, HR practices, partners and financing the project, they concluded that building organisations with coherent human resource systems is critical to sustaining the company. Underpinning the designs of the companies they found were three dimensions that tended to have common practices: attachment, coordination and control, and selection. Attachment to a young company was generated primarily through one of three drivers; love (creating a strong familylike emotional commitment among employees), work (offering interesting and challenging work that created a commitment to seeing the project through) and money (a financial contract to secure commitment). Coordination and control had four primary forms; informal or cultural peer control whereby the commitment to each other provided a selfregulating behaviour; professional control in which the work demands a professional standard and commitment that in turn provides a means of control; formal procedures and systems that guided the employees in the tasks and provided performance criteria, and lastly direct oversight and supervision. The selection process of new employees was characterised by three types of routines: either recruitment based largely upon the necessary skills and experience, a focus on a more long-term view with employees selected for their potential, or an emphasis on cultural fit with the organisation and team. Although there is a broad array of combinations between the three dimensions, the SPEC team outlined five blueprints of HR practice that seemed to describe a coherent set of practices by successful high-technology firms. Each is described by a quote that helps to characterise the firm’s culture and HR practice and Table 11.3 details the

ENTREPRENEURSHIP

TABLE 11.3

FIVE HR BLUEPRINTS BASED ON THREE DIMENSIONS DIMENSIONS

KEY FINDINGS

ATTACHMENT

SELECTION

COORDINATION AND CONTROL

Star

Work

Potential

Professional

Slowest to go public Post IPO, highest growth in market capitalisation Harder to scale More fragile and difficult to manage

Engineering

Work

Skills

Peer/culture

More robust and scalable Average performance by comparison

Commitment

Love

Cultural fit

Peer/culture

Fastest to go public Least likely to fail Harder to scale More fragile and difficult to manage

Bureaucracy

Work

Skills

Formal

More robust and scalable Average performance by comparison

Autocracy/direct control

Money

Skills

Direct

Most likely to fail

Source: James N. Baron and Michael T. Hannan, ‘Organizational Blueprints for Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies’, in California Management Review, vol. 44, no. 3 (Spring 2002), pp. 8–36. Copyright ª 2002 by the Regents of the University of California. Used by permission.

cont.

»

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cont.

practices of each in the three dimensions discussed above and summarises some performance findings. The five blueprints are: • • • • •

Star – ‘We recruit only top talent, pay them top wages and give them the autonomy and resources they need to do their job.’ Engineering – ‘We were very committed. It was a skunk-works type of mentality and the binding energy was very high.’ Commitment – ‘I wanted to build the kind of company where people would only leave when they retire.’ Bureaucracy – ‘We make sure things are documented, have job descriptions for people, project descriptions, and pretty rigorous project management techniques.’ Autocracy or direct control – ‘You work, you get paid.’ Source: ‘Organizational Blueprints for Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies’ by James N. Baron and Michael T. Hannan, California Management Review, Vol. 44, no. 3 (Spring 2002), pp. 8–36. Copyright ª 2002 by the Regents of the University of California. Used by permission.

UNIQUE MANAGERIAL CONCERNS OF GROWING VENTURES Emerging businesses differ in many ways from larger, more structured businesses. Several unique managerial concerns involve growing businesses in particular. These concerns may seem insignificant to the operation of a large business, but often they become important to emerging entrepreneurs.

THE DISTINCTIVENESS OF SIZE The distinction of smallness gives emerging businesses certain disadvantages. A small company, for example, may be restricted by its limited geographical market reach and be unable to extend throughout a region or state. Similarly, Internet-based businesses, while not confronted with problems of geographic reach and with the possible exception of ‘app’ business models, may be limited by the capacity to manage large transactional volumes. Another disadvantage is the higher ordering costs that burden many small firms. Because they do not order large lots of inventory from suppliers, small businesses usually do not receive quantity discounts and must pay higher prices. Finally, a smaller staff forces small firms to accept less specialisation of labour. Therefore, employees and managers are expected to perform numerous functions. However, the distinction of small size is not all bad, and the advantages to smallness should be recognised and capitalised on. One advantage is greater flexibility. In smaller ventures, decisions can be made and implemented immediately, without the input of committees and the delay of bureaucratic layers. Production, marketing and service are all areas that can be adjusted quickly for a competitive advantage over larger businesses in the same field. A second advantage is constant communication with the community.50 An entrepreneur lives in the community and is personally involved in its affairs. The special insight of this involvement allows the entrepreneur to adjust products or services to suit the specific needs or desires of the particular community. This leads to the third and probably most important advantage of closeness to the customer: the ability to offer personal service. The personal service that an entrepreneur can provide is one of the key elements of business success today. Major corporations work feverishly to duplicate or imitate the idea of personal service. Because the opportunity to provide personal service is an advantage that emerging firms possess by nature of their size, it must be capitalised on.

THE ONE-PERSON-BAND SYNDROME Most entrepreneurs start their businesses alone or with a few family members or close associates. In effect, the business is the entrepreneur and the entrepreneur is the business.51 However, a danger

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arises if the entrepreneur refuses to relinquish any authority as the emerging business grows. The one-person-band syndrome exists when an entrepreneur fails to delegate responsibility to employees, thereby retaining all decision-making authority. One study revealed that most planning in entrepreneurial firms is done by the owner alone, as are other operational activities.52 This syndrome is often derived from the same pattern of independence that helped start the business in the first place. However, the owner who continues to perform as a one-person band can restrict the growth of the business, because the owner’s ability is limited. How can proper planning for the business be accomplished if the owner is immersed in daily operations? Therefore, the entrepreneur must recognise the importance of delegation. If the owner can break away from the natural tendency to do everything, then the business will benefit from a wider array of that person’s abilities.

TIME MANAGEMENT Effective time management is not exclusively a challenge to entrepreneurs. However, limited size and staff force the entrepreneur to face this challenge most diligently. It has been said a person will never find time to do anything but must, in fact, make time. In other words, entrepreneurs should learn to use time as a resource and not allow time to use them.53 To perform daily managerial activities in the most time-efficient manner, owner/managers should follow four critical steps. 1 Assessment. The business owner should analyse his or her daily activities and rank them in order of importance. (A written list on a notepad is recommended.) 2 Prioritisation. The owner should divide and categorise the day’s activities based on his or her ability to devote the necessary time to the task that day. In other words, the owner should avoid procrastination. 3 Creation of procedures. Repetitive daily activities can be handled easily by an employee if instructions are provided. This organising of tasks can be a major time-saver for the owner that would allow the fourth and last step to be put into effect. 4 Delegation. Delegation can be accomplished after the owner creates procedures for various jobs. As mentioned in the description of the one-person-band syndrome, delegation is a critical skill entrepreneurs need to develop. All of these steps in effective time management require self-discipline on the part of entrepreneurs.

COMMUNITY PRESSURES Proximity to the community was mentioned earlier as a size advantage for small emerging ventures. However, unlike major corporations with public relations departments, the entrepreneur is involved with community activities directly. The community presents unique pressure to emerging entrepreneurs in three ways: participation, leadership and donations. (See ‘A community-level analysis’ exercise at the end of this chapter.) Each of these expectations from the community requires entrepreneurs to plan and budget carefully. Many community members believe that the entrepreneur has ‘excess’ time because he or she owns the business. They also believe that the owner has leadership abilities needed for various community activities. Although the latter may be true, the owner usually does not have excess time. Therefore, entrepreneurs need to plan carefully the activities they believe would be most beneficial. One consideration is the amount of advertising or recognition the business will receive for the owner’s participation. When the owner can justify his or her community involvement, both the business and the community benefit.

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Financial donations also require careful analysis and budgeting. Again, because consumers have access to the entrepreneur (as opposed to the chief executive officer of a major corporation), he or she may be inundated with requests for donations to charitable and community organisations. Although each organisation may have a worthy cause, the entrepreneur cannot support every one and remain financially healthy. Thus, the owner needs to decide which of the organisations to assist and to budget a predetermined amount of money for annual donations. Any other solicitations for money must be put in writing and submitted to the entrepreneur for consideration. This is the only way entrepreneurs can avoid giving constant cash donations without careful budget consideration. The critical fact to remember is that time and money are extremely valuable resources for an entrepreneur. They should be budgeted in a meaningful way. Therefore, entrepreneurs need to analyse their community involvement and to continuously reassess the costs versus the benefits.54

CONTINUOUS LEARNING A final unique concern for the entrepreneur is continuous learning. All of the previously mentioned concerns leave very little time for owners to maintain or improve their managerial and entrepreneurial knowledge. However, the environment of the twenty-first century has produced dramatic changes that can affect the procedures, processes, programs, philosophy and even the product of a growing business. As the ancient Greek philosopher Epictetus said, ‘It is impossible for a man to learn what he thinks he already knows’. This quote illustrates the need for entrepreneurs to dedicate time to learning new techniques and principles for their businesses. Trade associations, seminars, conferences, publications and university courses all provide opportunities for entrepreneurs to continue their entrepreneurial education. Staying abreast of industry changes is another way in which entrepreneurs can maintain a competitive edge.

ACHIEVING ENTREPRENEURIAL LEADERSHIP Entrepreneurial leadership may be the most critical element in the management of high-growth ventures. Terms such as ‘visionary’ and ‘strategic’ have been used when describing different types of leaders. Table 11.4 provides a comprehensive description of strategic leaders, visionary leaders and managerial leaders. It is the concept behind strategic leadership that research has demonstrated to be the most effective in growing organisations.55 Researchers have identified some of the most important concepts in effective strategic leadership.56 This type of leadership can be classified as entrepreneurial leadership, which arises when an entrepreneur attempts to manage the fast-paced, growth-oriented company.57 Entrepreneurial leadership can be defined as the entrepreneur’s ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a viable future for the organisation. If these leadership processes are difficult for competitors to understand and imitate, the firm will create a competitive advantage. Today’s fast-paced economy has created a new competitive landscape – one in which events change constantly and unpredictably. These changes are revolutionary in nature; that is, they happen swiftly and are relentless in their frequency, affecting virtually all parts of an organisation simultaneously. The ambiguity resulting from revolutionary changes challenges firms and their strategic abilities to increase the speed of the decision-making processes through which strategies are formulated and implemented.58 Growth-oriented companies need to adopt a new competitive mind-set – one in which flexibility, speed, innovation and strategic leadership are highly valued. With this mind-set, firms can identify and completely exploit opportunities that emerge in the new competitive landscape. These opportunities

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TABLE 11.4

STRATEGIC, VISIONARY AND MANAGERIAL LEADERSHIP

STRATEGIC LEADERS

VISIONARY LEADERS

MANAGERIAL LEADERS

•

•

•

• • •

•

• • • •

Synergistic combination of managerial and visionary leadership Emphasis on ethical behaviour and valuebased decisions Oversee operating (day-to-day) and strategic (long-term) responsibilities Formulate and implement strategies for immediate impact and preservation of long-term goals to enhance organisational survival, growth and longterm viability Have strong, positive expectations of the performance they expect from their superiors, peers, subordinates and themselves Use strategic controls and financial controls, with emphasis on strategic controls Use and interchange tacit and explicit knowledge on individual and organisational levels Use linear and non-linear thinking patterns Believe in strategic choice; that is, their choices make a difference in their organisations and environment

• • •

• • • • • •

•

• •

Are proactive, shape ideas, change the way people think about what is desirable, possible and necessary Work to develop choices, fresh approaches to long-standing problems; work from high-risk positions Are concerned with ideas; relate to people in intuitive and empathetic ways Feel separate from their environment; work in, but do not belong to, organisations; sense of who they are does not depend on work Influence attitudes and opinions of others within the organisation Concerned with ensuring future of organisation, especially through development and management of people More embedded in complexity, ambiguity and information overload; engage in multifunctional, integrative tasks Know less than their functional area experts More likely to make decisions based on values More willing to invest in innovation, human capital and creating and maintaining an effective culture to ensure long-term viability Focus on tacit knowledge and develop strategies as communal forms of tacit knowledge that promote enactment of a vision Utilise non-linear thinking Believe in strategic choice; that is, their choices make a difference in their organisations and environment

•

• •

• • • • • • •

• •

View work as an enabling process involving some combination of ideas and people interacting to establish strategies Are reactive; adopt passive attitudes towards goals; goals arise out of necessities, not desires and dreams; goals based on past Relate to people according to their roles in the decision-making process See themselves as conservators and regulators of existing order; sense of who they are depends on their role in organisation Influence actions and decisions of those with whom they work Involved in situations and contexts characteristic of day-to-day activities Concerned with and more comfortable in functional areas of responsibilities Expert in their functional area Less likely to make value-based decisions Engage in and support short-term, leastcost behaviour to enhance financial performance figures Focus on managing the exchange and combination of explicit knowledge and ensuring compliance to standard operating procedures Utilise linear thinking Believe in determinism; that is, the choices they make are determined by their internal and external environments

Source: W. Glenn Rowe, ‘Creating wealth in organisations: The role of strategic leadership’, Academy of Management Executive, 15(1), 2001: 82. Published by Academy of Management, ª 2001.

surface primarily because of the disequilibrium that is created by continuous changes (especially technological changes). More specifically, although uncertainty and disequilibrium often result in seemingly hostile conditions of intense rivalry, these conditions may simultaneously yield significant product-driven growth opportunities. Through effective entrepreneurial leadership, growth firms can adapt their behaviours and exploit such opportunities.59

STRATEGIC SUSTAINABLE DEVELOPMENT Our understanding of sustainability in the context of entrepreneurship is gradually becoming more sophisticated but we still have a long way to go. It is important to focus on how entrepreneurs can use sustainability concepts to guide long-term development of competitive advantage. Integrating environmental and social goals into corporate objectives is becoming an imperative for us all, not just for a few.

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One of the key goals for any entrepreneur is to be able to set a future direction for the enterprise. Entrepreneurial strategy involves the art of managing assets that one does not own. Now there is an increasing realisation that the Earth’s resources also fall into this category. We do not own them; they belong to our grandchildren and their children and we must not deplete them. New millennial entrepreneurs have to confront the challenges of how to put a strategy in place that at the same time grows the company as well as protects those resources that we do not own. Since at least the mid-1990s, a growing emphasis has been placed on economic actors and particularly entrepreneurs as central agents of change in addressing environmental and social issues or matters of sustainability. More and more companies are going green.60 The key to moving in this direction is re-conception of what is meant by the value proposition at the heart of the business model. There is increasing recognition that the value proposition is not merely an economic business case but also a societal and natural case that reflects both an added social and natural environment value. While tri-partite value creation (economic, social and natural) cannot by its very nature be easily achieved, Tilly and Young offer the following thought: However, entrepreneurs have the ideal characteristics required to experiment, take risks and put into practice these elements of the model [see Figure 11.6] and move towards sustainability entrepreneurship. Hence, entrepreneurs should not only be considered as contributors to a successful economy, but the driving force of a sustainable society.61 FIGURE 11.6 THE THREE LEGS OF SUSTAINABILITY ENTREPRENEURSHIP

SUSTAINABILITY ENTREPRENEURSHIP

Environmental sustainability

Futurity

Intergenerational equity Environmental stability Social responsibility Economic equity

Environmental entrepreneurship EcoEnvironment only effectiveness

Ecological equity

Sufficiency

Social entrepreneurship Socioeffectiveness

Ecoefficiency

Socioefficiency Economic entrepreneurship

Economic only

Social only

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The model referred to in Figure 11.6 illustrates the three legs of sustainability entrepreneurship and argues that neither social nor environmental forms of entrepreneurship are sufficient to qualify as sustainability entrepreneurship. According to Tilly and Young, sustainability wealth generation ‘means contributing a holistic net benefit to the economy, community and natural environment’.62

A CLIMATE-CHANGE SWOT

ENTREPRENEURSHIP IN PRACTICE

From a strategic vantage point, one way to look at how climate-related forces will affect your company is to consider their impact on both costs and revenue. A company’s ability to find opportunities in a carbon-constrained world will depend on its skill at hedging against physical climate risk, mitigating regulatory costs, avoiding expensive litigation and other threats to corporate reputation, managing climate risk in the supply chain, investing capital in low-carbon assets and innovating around new technology and product opportunities. Here are some prototype questions companies might ask themselves.

Strengths and weakness You need to think about your competition in two ways: reducing exposure to climate-related risks more so than your competitors, and finding more business opportunities within climate change than your competitors. The various aspects of climate-related risks will affect the firm’s cost of capital and ultimately its valuation. Investors will factor in your company’s ‘climate exposure’ into their estimates of future cash flow. Potential revenue drivers: • • • • • •

How will changes in customer-demand patterns affect pricing? What percentage of climate-related costs will you be able to pass through to the consumer? How can you generate new revenue streams for low-carbon products? How can you generate new income streams, such as from the sale of carbon credits? What threats do you face from low-carbon substitute products? What will be the impact on your revenue from weather changes?

• • • • • •

How will regulatory policy affect your bottom line? (For example, will you have to purchase emissions allowances?) What is the likelihood that emissions will be taxed? What capital investments or capital expenditures will you face as you reduce your emissions? How will the cost of your raw materials be affected? How much will your energy costs escalate? Do you have a risk profile that might increase your insurance premiums?

Potential cost drivers:

Opportunities and threats • Regulatory – mandatory emissions-reduction legislation • Supply chain – suppliers passing their higher carbon-related costs to you • Product and technology – rivals developing climate-friendly offerings before you do • Litigation – lawsuits charging you with negligence, public nuisance or trespass • Reputation – destructive consumer or shareholder backlash • Physical – damage to your assets through climate change-related drought, floods or storms. Source: Jonathan Lash & Fred Wellington, ‘Competitive advantage on a warming planet’, Harvard Business Review, March 2007. Copyright ª 2007 by Harvard Business Publishing. Used by permission.

THE SUSTAINABILITY HELIX The Sustainability Helix (see Figure 11.7) helps us understand how business can become more sustainable.63 Using the biological metaphor, the helix shows the interactions between the various strands that are complex and interactive. Each strand is supported by a series of strategies and tools.

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FIGURE 11.7 MANAGEMENT HELIX FOR THE SUSTAINABLE ORGANISATION (SUSTAINABILITY HELIX)

Governance and Management

Operations and Facilities

Design and Process Innovation

Sustainability Strategy

Sustainable Organisation

Ongoing review of strategic position – continuous improvement and best practice

Human Resource Development and Corporate Culture

Stage 4 Stage 3

Marketing and Communications

Partnerships and Stakeholder Engagement

Stage 2 Stage 1

Management Helix for the Sustainable Organisation A mutually reinforcing process to achieve lasting competitive advantage through lowering cost and differentiating products and services while delivering genuinely sustainable progress. Source: Copyright ª by The Natural Edge Project, Natural Capitalism and Global Academy. Published by The Natural Edge Project.

Taken together they are a mutually reinforcing process towards genuine sustainability development within the business.

The six strands Down the left-hand side of the helix are the six strands or areas within a company that help to create the sustainable organisation. • Governance and management: Corporate governance in the twenty-first century requires a broad set of management tools and processes to ensure that companies not only prosper economically, but are also socially and environmentally responsible. • Operations and facilities: There is enormous scope for improving the efficiency and effectiveness of most business practices and operations and in doing so to reduce costs and external impacts. • Design and process innovation: Businesses that can rapidly translate customer needs into new or improved products and services, in light of constraints (present or anticipated), reap the benefits of first-mover advantage. • Human resource development and corporate culture: Sustainability strategies often dramatically improve productivity by creating healthier and more inspiring workplaces, fostering feedback and employee contributions to continuous improvement, encouraging strategic risk-taking cultures, improving knowledge of global developments and technological advances, and aligning corporate goals with long-term societal and personal values.

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• Marketing and communications: Competitive advantage arises out of the value that a firm continues to provide to its customers. Trust is now an underpinning value between an organisation and its consumers, and sustainability offers opportunities for businesses to strengthen their competitive advantage by meeting customer needs to feel good about their consumption choices. • Partnerships and stakeholder engagement: In order to remain competitive in a market growing in complexity, an organisation must take advantage of developing relationships, partnerships and alliances with a range of other organisations, institutions and groups within society.

Sustainability management stages Across the bottom of the helix are the four stages that an entrepreneurial business would go through on the way to achieving a sustainable business. Stage 1: Exploration of sustainability operations and business, social and natural cases, development of internal tools, procedures and capabilities, and commitment to the sustainability journey. The willingness to embark on the sustainability journey typically arises when a change agent within the company has determined that this is a process worth exploring. The work of this stage is to develop an understanding of what sustainability is (to the company), and to then explore the value of sustainability to the mission and business model of the company. Stage 2: Quiet learning-mode implementation through experimentation, capability development and, starting with pilot projects, assembling whole-systems; solidifying commitments and momentum. At this stage, the company becomes willing to make a commitment to operating in more sustainable ways. The company undertakes to commit resources to set clear indicators of success, assess its social and environmental impacts and prove through the pilot projects the validity of the case for sustainability. Stage 3: Public commitments anchor momentum for use of sustainability throughout operations and value chain; and natural and human capital impacts are understood and being neutralised. At this stage, the company has assured itself that there is a strong case for sustainability and is ready to make a systemic commitment to behave responsibly towards the planet and society through its operations and influence. In this stage, a company implements its sustainability strategy throughout its operations, activities and its value chain. It builds upon its responsibility to enhance shareholder value by taking a public leadership role within its industry and the world at large. Public commitments perpetuate momentum towards minimising impacts on natural and human capital and beginning to behave in ways that reinvest in all forms of capital. Stage 4: Full competitive advantage realised through integration such that ‘sustainability management’ no longer is necessary; and improving natural and human capital through operations. At this stage, a company is in a position to ensure that a high level of competitive advantage has been realised through integration of sustainability concepts, methodologies and processes into business practice. By the end of this level, the goal is for the company to become a truly sustainable corporation. Through its activities the company restores human and natural capital, maximises shareholder value and finds its rightful place in the whole of society in which business, civil society, government and all other stakeholders contribute to achieving genuine progress.

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NEW STRATEGIC TOOLS There are many new types of tools that an entrepreneurial strategist can use. Many of the most interesting ones are emerging from the needs of firms to come to grips with climate change. In Table 11.5 we present five such tools which are intended to facilitate setting up, financing, managing or monitoring biodiversity business investments. Simply change the word biodiversity to ‘water’, ‘food’, ‘energy’, ‘population’, etc. and you will see the power of this instrument for entrepreneurial planning. TABLE 11.5

BIOTOOLS FOR BIODIVERSITY BUSINESSES

TOOL

PURPOSE

BioDefinition

To establish the biodiversity context of the business and identify potential linkages between the business and biodiversity in the bioregion. The BioDefinition tool is used to guide early decisions about creating or investing in a biodiversity business. It provides businesses and investors with an initial idea of the biodiversity-related risks and opportunities associated with the business. Potential investors and sponsors can use results to screen potential investments for their positive contribution to biodiversity.

BioSwot

To analyse the key strengths, weaknesses, opportunities and threats in the linkages between the business and the biodiversity in the bioregion. The BioSwot is used to guide the further development of a Biodiversity Business Plan (BBP) or to prepare a more detailed analysis of an investment opportunity.

Biodiversity Management Plan

To define a set of actions by which biodiversity performance of the business can be optimised, and to assist in integrating the Biodiversity Management Plan (BMP) with the business development plan. The BMP is usually developed during the later stages of business planning or as a key element of pre-investment appraisal, following the application of the BioDefinition and BioSwot tools.

BioGovernance

To put in place structures to preserve the biodiversity integrity of the business and to secure achievement of biodiversity performance. The BioGovernance tool is applied when institutional arrangements for the biodiversity business are developed and is closely linked to the development of the BMP and BBP.

BioPerformance Monitoring

To evaluate and report on the business’s achievement of objectives. The tool is applied throughout the life of the project from the time business activity commences, or at any time during the lifetime of the biodiversity business, after the completion of the key inputs, namely determination of biodiversity objectives and BMP completion.

Source: Joshua Bishop, Sachin Kapila, Frank Hicks, Paul Mitchell & Francis Vorhies, Building biodiversity business, London and Gland (Switzerland): Shell International Limited and the World Conservation Union, 2007: 119. Published by Shell International Limited and the International Union for Conservation of Nature and Natural Resources, ª 2008.

STRATEGIC BACKCASTING Business is nothing more than a highly designed part of the natural ecosystem. It is dependent on and influenced by the same laws that are in operation in nature itself. A technique called strategic backcasting is an excellent approach to exploring the strategic implications of sustainability.64 Backcasting is a methodology for planning under uncertain circumstances and it means looking back from the future. It is the opposite of forecasting, which means looking to the future from the present, something that the conventional business strategist has done for decades. Whereas forecasting is the process of predicting the future based on current trend analysis, backcasting approaches the challenge from the opposite direction. Backcasting is ‘a method in which the future desired conditions are envisioned and steps are then defined to attain those conditions, rather than to take steps that are merely a continuum of present methods extrapolated into the future’.65

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The method begins by examining several alternative future scenarios, usually from a normative (or desirable) perspective. Then quantitative analysis kicks in. The question is asked: If we want to arrive at Scenario A, what trends would need to change to get us there? For example, if Scenario A was a future in which CO2 emissions were stabilised at X parts per million, and Scenario B was CO2 stabilisation at Y parts per million, then a quantitative analysis could help assess which one was more plausible under any given set of assumptions. This is now known as ‘The Natural Step’ Framework (see Figure 11.8 and Table 11.6). The Framework uses The Natural Step Funnel as a metaphor to describe its methodology: Imagine looking at a giant funnel from the side. The upper wall is the availability of resources and the ability of the ecosystem to continue to provide them. The lower wall is our demand for these resources which we need to make clothes, shelter, food, transportation and other items and the ecosystems that create them. The things we need to survive – food, clean air and water, productive topsoil and others – are in decline. So is nature’s ability to regenerate them. But at the same time, our demand for these resources is growing. There are more than six billion people on the planet and the population is increasing. Our level of consumption is increasing. As our demand increases and the capacity to meet this demand declines, society moves into a narrower portion of the funnel. As the funnel narrows there are fewer options and less room to manoeuvre. Organisations that continue business-as-usual are likely to hit the walls of the funnel, and fail. Every one of us lives and works in this funnel and every one of us has the opportunity to be more strategic about our choices and long-term plans. Through innovation, creativity and the unlimited potential for change, we can shift toward sustainability and begin to open up the walls of the funnel. Forward-looking organisations can position themselves to avoid the squeeze of the funnel and invest toward opening the walls and creating a truly sustainable and rewarding future.66 FIGURE 11.8 THE NATURAL STEP FUNNEL AS A STRATEGIC PLANNING TOOL

The Natural Step Resource Funnel Declining supply Resources and ecosystem services

Sustainable supply Sustainable future Sustainable demand Margin for action is narrowing

Increasing demand Resources and ecosystem services

The present

The future

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STAGES OF SUSTAINABILITY STRATEGY Hart graphically leads us through four stages of a company’s possible environmental strategy (see Table 11.6). The first three stages propel the company towards the fourth stage. This diagnostic tool can help the entrepreneur determine whether his or her strategy is consistent with sustainability. First, assess your capability in each of the four quadrants by answering the questions in each box. Then rate yourself on the following scale for each quadrant: 1 – nonexistent, 2 – emerging, 3 – established or 4 – institutionalised. Ultimately, we seek balance in all four quadrants. TABLE 11.6

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FOUR STAGES OF A SUSTAINABILITY GROWTH STRATEGY INTERNAL

EXTERNAL

Today

Stage one: Pollution prevention The first step for most companies is to make the shift from pollution control to pollution prevention. Pollution control means cleaning up waste after it has been created. Pollution prevention focuses on minimising or eliminating waste before it is created. Where are the most significant waste and emission streams from our current operations? Can we lower costs and risks by eliminating waste at the source or by using it as useful input?

Stage two: Product stewardship Product stewardship focuses on minimising not only pollution from manufacturing but also all environmental impacts associated with the full life cycle of a product. As companies in stage one move closer to zero emissions, reducing the use of materials and production of waste requires fundamental changes in underlying product and process design. What are the implications for product design and development if we assume responsibility for a product’s entire life cycle? Can we add value or lower costs while simultaneously reducing the impact of our products?

Tomorrow

Stage three: Clean technology Companies with their eye on the future can begin to plan for and invest in tomorrow’s technologies. Clean technologies are desperately needed in the emerging economies of Asia. Urban pollution there has reached oppressive levels. Is the environmental performance of our products limited by our existing competency base? Is there potential to realise major improvements through new technology?

Stage four: Sustainability vision A vision of sustainability is like a road map to the future, showing the way products and services must evolve and what new competencies will be needed to get there. Does our corporate vision direct us towards the solution of social and environmental problems? Does our vision guide the development of new technologies, markets, products and processes?

Source: Adapted from Hart, S. (2005). ‘Innovation, creative destruction and sustainability.’ Research Technology Management, September-October, 21–7; Hart, S (1997). Beyond greening: Strategies for a sustainable world. Harvard Business Review, 75(1), 74. Published by Harvard Business Publishing, ª 1997.

Search the Natural Step website for cases and resources on Backcasting and other tools for sustainable development for your business. Visit: http://www.naturalstep. org/en/current_ projects_all

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SUMMARY Although many ways of strategically planning a venture exist, all have one common element: Each is an extension of the entrepreneur’s vision by taking the owner’s concept of the business and putting it into action. The development of strategy for an entrepreneur is cyclical and iterative and relies on market learning and customer insight. Entrepreneurs may not use strategic planning for many reasons, among them scarcity of time, lack of knowledge about how to plan, lack of expertise in the planning process and lack of trust in others. A number of benefits to strategic planning exist. In particular, studies have shown that small firms that use this process tend to have better financial performance than those that do not. Other benefits include more efficient resource allocation, improved competitive position, higher employee morale and more rapid decision making. However, there are also a number of fatal flaws to be avoided in defining a strategy. Strategic positioning was discussed with respect to defining defensible positions in a marketplace and the concept of business model design was presented to draw attention to the various perspectives that need to be aligned during the strategy formulation through to implementation process. The different types of logic were discussed with respect to strategy relating to relative newness of products and markets, and particularly Blue Ocean Strategy was introduced as a means to minimise competition and create new market dominance. The challenges of business growth were then introduced starting with discussion of a typical life cycle of a venture that has five stages: development, start-up, growth, stabilisation and innovation or decline. The chapter then focused on divisions between an entrepreneurial and a managerial mind-set and ways to maintain an entrepreneurial frame of mind while making the necessary adjustments to deal with the growth phase. The balance between the entrepreneurial and managerial approaches was reviewed which raised the consideration of five major factors: strategic orientation, commitment to seize opportunities, commitment of resources, control of resources and management structure. This differentiation of major factors is important for analysing aspects of the venture that need either more administrative or more entrepreneurial emphasis. The chapter then examined the importance of a venture’s growth stage. Underscoring the metamorphosis a venture goes through, several management issues were discussed including control, responsibility, building the desired adaptive firm and managing paradox and contradiction. In addition, the challenge of confronting the growth wall was addressed and the unique managerial concerns of growing ventures were outlined. The concept of entrepreneurial leadership was introduced as a way for entrepreneurs to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a viable future for the growth-oriented venture. Finally, the chapter examined strategy from the perspective of sustainability and described several of the emerging tools that an entrepreneurial strategist can use to come to grips with the era of climate change and global warming.

KEY TERMS AND CONCEPTS adaptive firm Blue Ocean Strategy dynamic capabilities effectual logic entrepreneurial leadership entrepreneurial strategy growth stage growth wall life cycle stages managerial mind-set mission moral failure

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Natural Step Funnel new-venture development one-person-band syndrome operational capabilities personal failure stabilisation stage start-up activities strategic backcasting strategic intent strategic planning strategic positioning SWOT analysis

Review key terms with interactive flashcards

uncontrollable failure value innovation value proposition vision

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REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

In what way does an entrepreneur’s vision affect the company’s strategic plan? Describe the entrepreneurial strategy process. What are the four major elements of the process and what does each entail? Give three reasons why many entrepreneurs fail to formulate strategic plans. Explain the five fatal flaws of strategic planning for an entrepreneur and outline how an entrepreneur can avoid these. Briefly identify and describe the stages of development for a new venture. What strategic approach can a new firm take to avoid having to confront powerful competitors? Explain the two key insights needed to adopt this approach to strategy. How can entrepreneurs build an adaptive firm? Define a business model and describe the three perspectives that are embedded in its definition. What are the elements of the business model that drive each of these perspectives and what is central to all the elements? Comparing the entrepreneurial focus with the administrative focus involves five major areas of consideration. What are these areas? Identify and describe the four key factors that need to be considered during the growth stage. What is meant by managing paradox and contradiction? Identify five unique managerial concerns of growing businesses. Explain the advantages and disadvantages of the size distinctiveness of entrepreneurial firms. Explain the concept of entrepreneurial leadership. What are three ways of planning for a sustainable business? What is the Natural Step Funnel? Make up examples that backcast from the future.

EXPERIENCING ENTREPRENEURSHIP The TOWS Matrix Directions: Using the concept of the SWOT analysis presented in this chapter, the TOWS Matrix allows an analysis of a new venture based on its combined Strengths, Weaknesses, Opportunities and Threats. Find a new start-up venture and work with the CEO to establish the combinations of the following: Strengths, in light of Opportunities; Strengths, in light of Threats; Weaknesses, in light of Opportunities; and Weaknesses in light of Threats. This combination of the SWOT Matrix will help you to understand that tactics of a company should be based on its own recognised strengths and weaknesses within the framework of the external environment. TOWS MATRIX

Strengths – S

Weaknesses – W

Opportunities – O

SO Strategies

WO Strategies

Threats – T

ST Strategies

WT Strategies

EXPERIENCING ENTREPRENEURSHIP The venture life cycle Listed below are the five basic phases or stages of the typical life cycle of a venture, labelled (A) to (E). Rank these from 1 to 5, beginning with the first phase and continuing to the last. Then

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examine the list of activities (a) to (j) and place a 1 next to those that happen during the first phase of the venture, down to a 5 next to those that occur during the last phase. Answers are provided at the end of the chapter. A Growth B Innovation or decline C Start-up D Stabilisation E New-venture development a Transition from one-person leadership to team management leadership b New-product development c Search for capital d Increased competition e Venture assessment f Attempts to acquire other firms g Consumer indifference to the entrepreneur’s goods or services h Accumulation of resources i Major changes in entrepreneurial strategy j Development of an effective entrepreneurial team

EXPERIENCING ENTREPRENEURSHIP A community-level analysis A study of community demographics helps entrepreneurs to determine a strategy based upon the composition or make-up of consumers who live within the community. These data typically include such statistics as community size, the residents’ purchasing power (disposable income), average educational background and types of occupation, the percentage of residents who are professionals and non-professionals and the extent of entrepreneurial activity in the community. A few factors may be of special strategic concern in this data analysis. One is the size of the new venture relative to the community itself and to other businesses in the community. Analysis of this factor helps the entrepreneur evaluate the new venture’s potential in terms of sales, growth, employment and attraction of customers. Each variable is directly related to the size factor and all variables are interrelated. For example, a new venture may actually increase the total sales of all competitive firms in the community. A new furniture store located opposite an established furniture store often will serve to increase overall sales for both by drawing more business to the locale. People from other communities will come to comparison shop and will stay to buy. People from the local community will be more likely to purchase their furniture from one of these two stores than to drive to other communities to do so. The major reason is that furniture is a comparison good and most people like to look at the offerings of at least two stores before they buy. Another important demographic characteristic is the amount of entrepreneurial activity in the community. To assess this factor, it is important to count the number of entrepreneurs in the community, to examine their types of business ventures and to establish their track records with suppliers (within and outside the region), their success with local banks and their customer base. If the community has a lot of entrepreneurial activity, it will be more receptive to new ventures and doors will be more easily opened. For example, local banks will be more accustomed to reviewing entrepreneurial loan applications and will have developed expertise in evaluating such applications and dealing with follow-up business. Assume you are in the process of opening a small retail hardware store. Choose a site location in your community and then answer the following questions about the community, potential customers, competition and location.

Potential of the trading area 1 2 3

How big is the trading area? [sq km] What is the customer potential within five kilometres? [customers] What is the density of population? [people per sq km]

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4 5 6 7 8 9 10 11 12 13 14 15 16

Is transportation adequate for supplies? [yes or no] What is the income level of the trading area? [per capita] What is the local employment pattern, based on number of people employed? [% people employed] What is the general make-up of the community? [residential/old] What are the trends in population and income? [up or down] Are new constructions increasing? [yes or no] Are school enrolments up? [yes or no] Are retail sales increasing? [yes or no] Have average business improvements been made recently? [yes or no] Does business property have a high vacancy rate? [yes or no] Have shopping patterns changed drastically in recent years? [yes or no] Are customers moving to or away from the potential location? [to/from] What are the present zoning restrictions?

Can customers get to the location? 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Is the area served by adequate public transportation? [yes or no] How broad an area does the transportation service encompass? [sq km] Is the area generally attractive to shoppers? [yes or no] Can it be easily reached by car? [yes or no] Is public parking adequate and relatively inexpensive? [yes or no] How many spaces in the available nearby car park are taken up by all-day parkers? [many/few] If located on a highway, is the location easily accessible from the main traffic flow? [yes or no] What are restrictions on signs and store identification? If the location is on a limited access road, how close is the nearest interchange? [kilometres] Is the location accessible to delivery trucks? [yes or no] Is the traffic speed too fast to encourage entrance by car? [yes or no] Are most customers who drive past the location on their way to work or on shopping trips? [on way to work/on shopping trips] Will nearby stores help you? Are the other stores in the shopping centre, neighbourhood or highway location of a nature that will attract customers who also will become patrons of your store? [yes/no/maybe/likely] What are the prospects for changes in traffic flow in the near future? [slight/likely] Will anticipated changes improve or damage the location? [improve/damage] Are zoning changes planned that would affect accessibility of the location? [yes or no]

Judging the competition 1 2 3 4 5 6 7 8 9 10 11 12 13

How many other businesses of the same kind exist between the prospective location and the most highly populated area? [no. of stores] Is this spot the most convenient store location in the area? [yes or no] How many other stores of the same kind are in this trading area? [no. of stores] How many of them will compete with you for customers? [no. of stores] Do these other stores have better parking facilities? [yes or no] Do these other stores offer the same type of merchandise? [yes or no] Do you consider these other stores more aggressive or less aggressive than your own operation will be? [more/less] What other competing stores are planned for this trading area in the near future? Are other potential sites that are closer to the majority of customers likely to be developed in the near future? [yes or no] Are your major competitors well-known, well-advertised stores? [yes or no] Does a need for another store of this kind in the area actually exist? [yes or no] How well is the demand for this product being met in the area? [very well/moderately well/not at all] If any empty stores or vacant lots are near the location, is a competitive store planned for them? [yes or no]

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Can the location attract new business? 1 2 3 4 5 6 7 8 9 10

Is the location in an attractive district? [yes or no] Do numerous stores exist that will draw potential customers for you into the area? [yes or no] Is the location near well-known and well-advertised stores? [yes or no] Is this location the most attractive one in the area? [yes or no] Is the location on the side of the street with the busiest customer traffic? [yes or no] Is the location nearer to the general parking area than locations of competing companies? [yes or no] Is the location in the centre of or on the fringe of the shopping district? [centre/fringe] Is it near common meeting places for people, such as public offices? [yes or no] Are most of the people passing the store prospective customers? [yes or no] Are the people who pass usually in a hurry, or are they taking time to shop? [in a hurry/taking time to shop]

Cost of the location 1 2 3 4 5 6

What will your rent be? [per month] Who will pay the utility costs? [you/others] Who pays additional costs, such as taxes, public services and costs of improvements? [you/others] What are the possibilities for eventual expansion? [good/poor] Are good employees available? [yes or no] Will your potential income justify your costs? [yes or no]

Final analysis Based on your analysis, is this a good community in which to open a retail hardware store? Explain.

CASE STUDIES CASE 11.1 The Cashew Case Part 3: Is there a viable business model? (Note: This is Part 3 of a three-part case featured in Chapters 2, 10 and 11. Please refer to the earlier chapters for further information.) Mrs Villaviray continued to develop her marketing plan for her four products: (a) roasted whole cashew kernels, (b) split cashew kernels, (c) cashew prunes (from the dried cashew apple) and (d) cashew wine. However, she also knew that an idea and a bit of market intelligence would not be enough for her perceived opportunity to be sustained as a business. She thought she should also think about her business model. Mrs Villaviray realised she hadn’t assembled the costings and pricing models for the products. She sat down and figured out some of the missing information. Facility and Capital Requirements: Based on the potential supply of raw material in the project area, the integrated cashew processing plant could be designed to process a daily input of 120 kg cashew nuts and 50 kg cashew apples. The total investment cost would amount to around P299 274.00 (1 AU$¼P35), which includes a working capital of P50 000.00 sufficient for a month long operation of the enterprise. Raw Material Inputs: Raw cashew nuts for processing could be sourced from the harvest of the farmer-cooperator and from cashew farmers in the village. The cashew nuts purchased by the enterprise varied in size. Generally, the larger nuts (about 60 per cent of the yield) were processed into whole cashew kernels while the smaller nuts (about 40 per cent of the yield) were shelled using a splitter to produce split cashew kernels. It was assumed the cashew nuts could be procured from the farmers at a price of P24/kg. For the cashew apple, which contains 30–40 per cent juice by weight, the price could be around P2.50/kg. Processed Products Costs and Value Added: On average, the costs for 1 kg of roasted cashew kernels comprised the costs of raw material (cashew nuts), and processing and were estimated to be 32.5, 25.2 per cent of the selling price,

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respectively. For cashew prunes and wine, the average processing cost would represent about 58 per cent of the selling price per pack, while the average raw material (apple) cost would only be about 9.7 per cent. The roasted whole cashew kernels it was estimated would sell for P350.00, (per kg) while the roasted split cashew kernels could sell for P250.00 (per kg). The selling price for the cashew prunes was estimated at P35.00 (per 200 g pack). The wine could attract a selling price of P35.00 (per 375 ml bottle). Now, Mrs Villaviray thought, does all this stack up? Is there a value proposition to underpin the market position? Does the venture make sense in economic terms? And, how will I sustain the operations of the business? What is in it for my operational partners and suppliers and can I maintain the activities of the venture? TASK Review Parts 1 and 2 of this case in chapters 2 and 10. Using the nine-quadrant business model tool in Figure 11.3, complete each cell for the business and check that a value proposition can underpin the three different perspectives; market position, economic and organisational architecture. Summarise your analysis by addressing the following problem areas: 1 Is there a compelling value proposition for the customers to buy the products of this company? How should the venture develop and maintain customer relationships? What is missing by way of information that could complete a view of the business model from this perspective? 2 Is the venture worth the effort? Does the difference between the estimated market price and the preliminary costing of each product (the gross margin) suggest a viable business case? 3 What are the issues with respect to the operational side of the business? Who are the key partners needed to get the business under way and what are the key resources and activities of the business? What does the business offer that will maintain the interest and loyalty of the suppliers and partners? Source: Linking Farmers to Market: Some Success Stories from Asia-Pacific Region, Asia-Pacific Association of Agricultural Research Institutions (APAARI), FAO Regional Office for Asia and the Pacific, Bangkok, Thailand, May 2008. Copyright ª 2008 APAARI.

CASE 11.2 Keeping things going Because of a surge in outsourcing contracts coming in from the US, the Wadhwani Company of Hyderabad has grown 115 per cent in the past year and 600-plus per cent in the past three years. A large portion of this growth is attributable to Sharma Subramonia’s philosophy of hiring the best possible computer systems people and giving them the freedom they need to do their jobs. Most of Sharma’s personnel operate as part of work teams that analyse, design and implement computer systems for clients. First, the company will get a call from a potential client indicating that it needs to have a computer system installed or special software written for its operations. Sharma will send over one of his people to talk to the client and analyse the situation. If it turns out that the Wadhwani Company has the expertise and personnel to handle the job, the client will be quoted a price. If this price is acceptable, a Wadhwani work group will be assigned the project. An example of a typical project is the manufacturing client who called three weeks ago and wanted to purchase five personal computers for his firm’s engineering staff. The company wanted these machines hooked up to the main computer and to have a dedicated connection to their Houston, Texas office. Additionally, the firm wanted its computer-aided design software to be modified so the engineers could see their computer-generated drawings in a variety of colours, not just in monochrome. The Wadhwani group installed the entire system and modified the software in 10 working days. Sharma realises that the growth of his enterprise will be determined by two factors. One is the creativity and ingenuity of his workforce. The other is the ability to attract talented personnel. ‘This business is heavily labour intensive’, he explained. ‘If someone wants a computer system installation, that may take 100 labour hours. If I don’t have the people to handle the project, I have to turn it down. My expansion is heavily dependent on hiring and training talented people. Additionally, I need more than just hard workers. I need creative people who can figure out new approaches to handling complex problems. If I can do these two things, I can stay a jump ahead of the competition. Otherwise, I won’t be able to survive.’

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In dealing with these key factors for success, Sharma has initiated three changes. First, he has instituted a bonus system tied to sales; these bonuses are shared by all of the personnel. Second, he gives quarterly salary increases, with the greatest percentages going to employees who are most active in developing new programs and procedures for handling client problems. Third, every six months the entire staff goes for a long weekend to a mountain area where they spend three days discussing work-related problems and ways of dealing with them. Time is also devoted to social events and to working on developing an esprit de corps among the personnel. QUESTIONS

1 2 3 4

In what phase of the venture life cycle is Sharma’s firm currently operating? How are Sharma’s actions helping to build an adaptive firm? Give three specific examples. If Sharma’s firm continues to grow, what recommendations would you make for future action? What else should Sharma be thinking about doing in order to keep things moving smoothly? Do you have ideas about how Sharma could acquire more of the US outsourcing business?

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

ANSWERS TO ‘THE VENTURE LIFE CYCLE’ a b c d e

3 5 2 4 1

f g h i j

5 4 1 3 2

SEARCH ME! ACTIVITIES growth stage growth wall innovation Natural Step 1

strategic planning sustainable competitive advantage SWOT analysis

A study of the resource based view of the firm will introduce the idea of dynamic capabilities. Dynamic capabilities are those that bring about strategic change within an organisation. In the article by V. K. Gupta, D. K. Dutta and X. Chen (2014), ‘Entrepreneurial orientation capability and firm performance under conditions of organizational learning’ in Journal of Managerial Issues, 26(2), pp. 157–73, the authors argue that entrepreneurial orientation is a dynamic capability that underpins firm performance. Locate this article and examine the elements of entrepreneurial orientation. Present a case with examples of how your new firm may exhibit the behaviours of entrepreneurial orientation.

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2

Networking is a key concept for entrepreneurs for establishing and growing their new venture. In the article by Tina Bratkovic, Bostjan Antoncic and Mitja Ruzzier (2009), ‘Strategic utilization of entrepreneur’s resource-based social capital and small firm growth’ in Journal of Management and Organization, 15(4), 486–99, they explain some of the ways in which networking influences firm growth. Based on your reading of this article, discuss to what extent the networking capability of an entrepreneur should or should not influence a decision to pursue growth of their venture.

ENDNOTES 1 Bhide, A. (1994). How entrepreneurs craft strategies that work. Harvard Business Review, March/April, 150–61; and Gruber, M. (2007). Uncovering the value of planning in new venture creation: A process and contingency perspective. Journal of Business Venturing, 22(6), 782–807. 2 Shane, S. & Delmar, F. (2004). Planning for the market: Business planning before marketing and the continuation of organizing efforts. Journal of Business Venturing, 19(6), November, 767–85. 3 This definition is adapted for entrepreneurship from Mintzberg, H. & Quinn, J. B. (1996). The strategy process. New Jersey: Prentice-Hall. It takes into account that a firm, in its formative stage, has no defined pattern of operations, is likely not to have achieved any formal organisation and has very few owned resources to allocate. 4 Hitt, M. A., Ireland, R. D. & Hoskisson, R. E. (2013). Strategic management: Competitiveness and globalisation (10th edn). Mason, OH: Cengage Learning. 5 Kuratko, D. F. & Audretsch, D. B. (2009). Strategic entrepreneurship: Exploring different perspectives of an emerging concept. Entrepreneurship: Theory and Practice, 33(1), January, 1–17. 6 See Lang, J. R., Calantone, R. C. & Gudmundson, D. (1997). Small firm information seeking as a response to environmental threats and opportunities. Journal of Small Business Management, 35(1), 11–23; and Beal, R. M. (2000). Competing effectively: Environmental scanning, competitive strategy, and organisational performance in small manufacturing firms. Journal of Small Business Management, 38(1), 27–47. 7 Mintzberg, H. (1994). The fall and rise of strategic planning. Harvard Business Review, January/February, 107–14. 8 Matthews, C. H. & Scott, S. G. (1995). Uncertainty and planning in small and entrepreneurial firms: An empirical assessment. Journal of Small Business Management, 33(4), 34–52; and Haber, S. & Reichel, A. The cumulative nature of

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the entrepreneurial process: The contribution of human capital, planning, and environmental resources to small venture performance. Journal of Business Venturing, 22(1), 119–45. 9 Mullins, J. W. & Forlani, D. (2005). Missing the boat or sinking the boat: A study of new venture decision making. Journal of Business Venturing, 20(1), January, 47–69; and Ensley, M. D., Pearce, C. L. & Hmieleski, K. M. (2006). The moderating effect of environmental dynamism on the relationship between entrepreneur leadership behavior and new venture performance. Journal of Business Venturing, 21(2), 243–63. 10 Dunn & Bradstreet, (1995). Business failure record. New York, NY: Dunn and Bradstreet. 11 Robinson, R. B. (1982). The importance of outsiders in small firm strategic planning. Academy of Management Journal, 25(2), March, 80–93. 12 Griggs, H. E. (2002). Strategic planning system characteristics and organisational effectiveness in Australian small-scale firms. Irish Journal of Management, 23(1), 23. 13 Ibrahim, A. B. (1993). Strategy types and small firm’s performance: An empirical investigation. Journal of Small Business Strategy, Spring, 13–22. 14 Schwenk, C. R. & Shrader, C. B. (1993). Effects of formal strategic planning on financial performance in small firms: A meta analysis. Entrepreneurship Theory and Practice, 17(3), Spring, 53–64; see also Olson, P. D. & Bokor, D. W. (1995). Strategy processcontent interaction: Effects on growth performance in small, startup firms. Journal of Small Business Management, 33(1), 34–44. 15 Porter, M. E. (1991). Knowing your place – how to assess the attractiveness of your industry and your company’s position in it. Inc., September, 90–4. 16 Porter. Knowing your place, 93. 17 Ireland, R. D., Hitt, M. A., Camp, S. M. & Sexton, D. L. (2001). Integrating

entrepreneurship and strategic management actions to create firm wealth. Academy of Management Executive, 15(1), February, 49–63. 18 Porter, M. E. (1996). What is strategy? Harvard Business Review, November/ December, 61–78. 19 Duck, J. D. (1993). Managing change: The art of balancing. Harvard Business Review, November/December, 109–18; Chan, Y. E., Bhargava, N. & Street, C. T. (2006). Having arrived: The homogeneity of high growth small firms. Journal of Small Business Management, 44(3), 426–40; Yim, H. R. (2008). Quality shock vs. market shock: Lessons from recently established rapidly growing U.S. startups. Journal of Business Venturing, 23(2), 141–64; and McKelvie, A. & Wiklund, J. (2010). Advancing firm growth research: A focus on growth mode instead of growth rate. Entrepreneurship Theory and Practice, 34(2), 261–88. 20 Cepeda, G. & Vera, D. (2007). Dynamic capabilities and operational capabilities: A knowledge management perspective. Journal of Business Research, 60, 426–37. 21 Hansen, M. Y., Nohria, N. & Tierney, T. (1999). What’s your strategy for managing knowledge? Harvard Business Review, 77(2), 106–16. 22 Zahra, S. A. (1999). The changing rules of global competitiveness in the 21st century. Academy of Management Executive, 13(1), 36–42. 23 George, G. & Bock, A. (2011). The business model in practice and its implications for entrepreneurship research. Entrepreneurship Theory and Practice, January, 83–111. 24 Morris, M., Schindehutte, M. & Allen, J. (2005). The entrepreneur’s business model: Toward a unified perspective. Journal of Business Research, 58, 726–35. 25 Osterwalder, A. (2004). The business model ontology: A proposition in the Design Science Approach. Unpublished dissertation, University of Lausanne. 26 Hofer, C. W. & Charan, R. C. (1984). The transition to professional

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management: Mission impossible? American Journal of Small Business, Summer, 3. See also Lowell, W. (1996). An entrepreneur’s journey to the next level. Small Business Forum, Spring, 68–74. 27 Hofer & Charan. The transition to professional management, 4. 28 Stevenson, H. H. & Gumpert, D. E. (1985). The heart of entrepreneurship. Harvard Business Review, March/April, 86–7. 29 Sarasvathy, S. D. (2005). What makes entrepreneurs entrepreneurial? Darden Business Publishing, Virginia, Social Science Research Network, UVA-ENT0065, available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id¼909038& download¼yes. 30 This strategy tool was originally developed by Igor Ansoff and published in ‘Strategies for diversification’, Harvard Business Review, 35(5), September/ October, 1957. 31 Kim, W. C. & Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review, October, 76–84. 32 Miner, J. B. (1990). Entrepreneurs, high growth entrepreneurs and managers: Contrasting and overlapping motivational patterns. Journal of Business Venturing, July, 221–34; Roberts, M. J. (1999). Managing growth. New business ventures and the entrepreneur. New York: IrwinMcGraw Hill, 460–4. 33 Chandler, A. (1962). Strategy and structure. Cambridge, MA: MIT Press. See also Masurel, E. & van Montfort, K. (2006). Life cycle characteristics of small professional service firms. Journal of Small Business Management, 44(3), 461–73. 34 See Lichtenstein, G. A. & Lyons, T. S. (2008). Revisiting the business life-cycle. Entrepreneurship and Innovation, 9(4), 241–50 for a thorough review of different life cycle stage theories. 35 Covin, J. G., Slevin, D. P. & Heeley, M. B. (2000). Pioneers and followers: Competitive tactics, environment and firm growth. Journal of Business Venturing, March, 175–210; and Mueller, B. A., Titus, V. K. Jr, Covin, J. G. & Slevin, D. P. (2012). Pioneering orientation and firm growth: Knowing when and to what degree pioneering makes sense. Journal of Management, 38(5), 1517–49. 36 Terpstra, D. E. & Olson, P. D. (1993). Entrepreneurial start-up and growth: A classification of problems. Entrepreneurship Theory and Practice, Spring, 5–20; and Golan, B. (2006). Achieving growth and responsiveness: Process management and market

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orientation in small firms. Journal of Small Business Management, 44(3), 369–85. 37 See Hood, J. N. & Young, J. E. (1993). Entrepreneurship’s requisite areas of development: A survey of top executives in successful entrepreneurial firms. Journal of Business Venturing, March, 115–35; and Morris, M. H., Miyasaki, N. N., Watters, C. R. & Coombes, S. M. (2006). The dilemma of growth: Understanding venture size choices of women entrepreneurs. Journal of Small Business Management, 44(2), 221–44. 38 Stevenson, H. H. & Jarillo-Mossi, J. C. (1986). Preserving entrepreneurship as companies grow. Journal of Business Strategy, Summer, 11; and Bradley, S. W., Wiklund, J. & Shepherd, D. A. (2011). Swinging a double-edged sword: The effect of slack on entrepreneurial management and growth. Journal of Business Venturing, 26(6), 537–54. 39 See also Kickul, J. & Gundry, L. K. (2002). Prospecting for strategic advantage: The proactive entrepreneurial personality and small firm innovation. Journal of Small Business Management, 40(2), 85–97. 40 Routamaa, V. & Vesalainen, J. (1987). Types of entrepreneurs and strategic level goal setting. International Small Business Journal, Spring, 19–29; see also Herron, H. & Robinson, R. B. Jr. (1993). A structural model of the effects of entrepreneurial characteristics on venture performance. Journal of Business Venturing, 8(3), May, 281–94. 41 Covin, J. G. & Slevin, D. P. (1990). New venture strategic posture, structure and performance: An industry life cycle analysis. Journal of Business Venturing, March, 123–33; see also Covin, J. G., Green, K. M. & Slevin, D. P. (2006). Strategic process effects on the entrepreneurial orientation-sales growth rate relationships. Entrepreneurship Theory and Practice, 30(1), 57–82. 42 Kuratko, D. F., Hornsby, J. S. & Corso, L. M. (1996). Building an adaptive firm. Small Business Forum, Spring, 41–8; and Eckhardt, J. T. & Shane, S. A. (2011). Industry changes in technology and complementary assets and the creation of high-growth firms. Journal of Business Venturing, 26(4), 412–30. 43 Hanks, S. H. & McCarrey, L. R. (1993). Beyond survival: Reshaping entrepreneurial vision in successful growing ventures. Journal of Small Business Strategy, Spring, 1–12; Bate, J. D. & Johnston, R. E. Jr. (2005). Strategic frontiers: The starting-point for

innovative growth. Strategy and Leadership, 33(1), 1–12. 44 See Thakur, S. P. (1999). Size of investment, opportunity choice and human resources in new venture growth: Some typologies. Journal of Business Venturing, May, 283–309; and Colombo, M. G. & Grilli, L. (2010). On growth drivers of high-tech start-ups: Exploring the role of founders’ human capital and venture capital. Journal of Business Venturing, 25(6), 610–26. 45 Katzenbach, J. R. & Smith, D. K. (1993). The discipline of teams. Harvard Business Review, March/April, 111–20; Dingee, A. L. M., Haslett, B. & Smollen, L. E. (2000–2001). Characteristics of a successful entrepreneurial management team. Annual editions. Guilford, CT: Dushkin/McGraw Hill, 71–5; and West, G. P. III (2007). Collective cognitions: When entrepreneurial teams, not individuals, make decisions. Entrepreneurship Theory and Practice, 31(1), 77–102. 46 Fombrun, C. J. & Wally, S. (1989). Structuring small firms for rapid growth. Journal of Business Venturing, March, 107–22; Kelley, D. J. & Rice, M. P. (2002). Advantage beyond founding: The strategic use of technologies. Journal of Business Venturing, 17(1), 41–58; see also Sherman, A. J. (2007). Grow fast, grow right. Chicago: Kaplan. 47 Hambrick, D. C. & Crozier, L. M. (1985). Stumblers and stars in the management of rapid growth. Journal of Business Venturing, 1(1), January, 31–45. 48 Osborne, R. L. (1994). Second phase entrepreneurship: Breaking through the growth wall. Business Horizons, January/ February, 80–6. 49 Osborne, R. L. Second phase entrepreneurship, 82–5. 50 See Cornwell, J. R. (1998). The entrepreneur as a building block for community. Journal of Developmental Entrepreneurship, Fall/Winter, 141–8. 51 Gumpert, D. E. & Boyd, D. P. (1984). The loneliness of the small business owner. Harvard Business Review, November/December, 19–24. 52 Naffziger, D. W. & Kuratko, D. F. (1991). An investigation into the prevalence of planning in small business. Journal of Business and Entrepreneurship, 3(2), October, 99–110. 53 Hobbs, C. R. (1990). Time power. Small Business Reports, January, 46–55; and Falvey, J. (1990). New and improved time management. Small Business Reports, July, 14–17. 54 Besser, T. L. (1999). Community involvement and the perception of success among small business operators

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in small towns. Journal of Small Business Management, 37(4), October, 16–29; and Mack, R. W. (1999). Event sponsorship: An exploratory study of small business objectives, practices, and perceptions. Journal of Small Business Management, 37(3), July, 25–30. 55 Rowe, W. G. (2001). Creating wealth in organisations: The role of strategic leadership. Academy of Management Executive, 15(1), 81–94. 56 Ireland, R. D. & Hitt, M. A. (1999). Achieving and maintaining strategic competitiveness in the 21st century: The role of strategic leadership. Academy of Management Executive, 13(1), 43–57. 57 Hitt, M. A., Ireland, R. D., Camp, S. M. & Sexton, D. L. (2001). Strategic entrepreneurship: Entrepreneurial strategies for wealth creation. Strategic Management Journal, 22(6), 479–92. See also Thompson, J. L. (1999). A strategic perspective of entrepreneurship. International Journal of Entrepreneurial Behavior and Research, 5(6), 279–96; and Alvarez, S. A., Ireland, R. D. & Reuer, J. J. (2006). Entrepreneurship and strategic alliances. Journal of Business Venturing, 21(4), 401–4.

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58 Kessler, E. H. & Chakrabarti, A. K. (1996). Innovation speed: A conceptual model of context, antecedents and outcomes. Academy of Management Review, 21, 1143–91. 59 Kuratko, D. F., Ireland, R, D. & Hornsby, J. S. (2001). Improving firm performance through entrepreneurial actions: Acordia’s corporate entrepreneurship strategy. Academy of Management Executive, 15(4), 60–71. 60 Hart, S. L. (1997). Beyond greening: Strategies. Harvard Business Review, 75(1), January, 66–76. 61 Tilly, F. & Young, W. (2009). Sustainability entrepreneurs: Could they be the true wealth generators of the future? Greener Management International, 79–92. Available at http:// www.greenleaf-publishing.com. 62 Tilly, F. & Young, W. Sustainability entrepreneurs, 88. 63 Natural Capitalism Solutions. Entrepreneuring the solutions: Key to competitiveness and prosperity, http:// www.natcapsolutions.org/helix/ HelixBasic.pdf. For a detailed description of the process, see Atkisson, A. et al. (2005). The natural advantage of nations:

Business opportunities, innovation and governance in the 21st century. London: Earthscan, 162–8. 64 Henrik, N. et al. (2008). Introducing templates for sustainable product development. Journal of Industrial Ecology, 12(4), August, 600–23; Holmberg, J. & Robe`rt, K-H. (2000). Backcasting from non-overlapping sustainability principles – a framework for strategic planning. International Journal for Sustainable Development & World Ecology, 7(4), December, 291–308, http://www.ima.bth.se/data/tmslm/refs/ Backcasting_0013.pdf; Holmberg, J. (1998). Backcasting: A natural step when making sustainable development operational for companies. Greener Management International, September, 30. 65 Holmberg, J. & Robe`rt, K-H. (2000). Backcasting from non-overlapping sustainability principles – a framework for strategic planning. 66 The Natural Step. The funnel, http:// www.thenaturalstep.org/the-funnel.

» CHAPTER TWELVE GLOBAL OPPORTUNITIES FOR ENTREPRENEURS CHAPTER OBJECTIVES

1 For Australia, the tyranny of distance has given way to the advantage of proximity. Australian Prime Minister Tony Abbott1 Today, thanks to a thriving world economy, global telecommunications and expanding travel, exchange among Europe, North America and the Pacific Rim is happening at an unparalleled pace. In the urban centres of the developing world signs of the international youth culture are almost everywhere . . . For the companies that sell these new international products, that understand the world as one single market, it is an economic bonanza. Naisbitt and Patricia Aburdene, Megatrends 20002

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Entrepreneurship

To examine the scope and breadth of global entrepreneurship around the Asia–Pacific region

2 To examine how entrepreneurs can actually start going global 3 To understand the motivations for going global 4 To explore the entrepreneurial benefits of importing and exporting 5 To discuss the advantages and disadvantages of other modalities of going global such as joint ventures, direct foreign investment, royalties, greenfield investments and ethnic networks 6 To explain how to conduct good research for global entrepreneurship 7 To understand how social entrepreneurs are part of the ongoing global movement 8 To understand the complicated role that entrepreneurs can and must play in helping the planet adapt to climate change

Chapter 12: Global opportunities for entrepreneurs 413

ASIA–PACIFIC’S ENTREPRENEURIAL CENTURY There has never been a better time for entrepreneurs to take advantage of opportunities in the Asia– Pacific region. Everyone reading this book will one day be dealing internationally, particularly with their closest neighbours. Just consider the potential in Japan, South Korea and China. These three countries have a combined population of 1.5 billion, a GDP of $15 trillion and buy more than half of Australia’s exports. By 2030, the number of middle-class consumers in the Asia–Pacific region is expected to sextuple to over 3 billion representing two-thirds of global consumers.3 With a bit of self-promotion and education, entrepreneurs in the Asia–Pacific region are in a great position to leverage their skills and capitalise on a greater understanding of and insight into Asian cultures: even more so than entrepreneurs from Europe or America. The new breed of global entrepreneur has grown of age using global networks for resources, design and distribution. The trend has escalated the global economy, and by all accounts, the pace and magnitude of this global economy are likely to continue to accelerate. Adept at recognising opportunities, the new breed of global entrepreneur understands that success in the global marketplace requires agility, certainty, ingenuity and a global perspective. These global entrepreneurs and social entrepreneurs are the true vanguard in the second decade of the twenty-first century. Global entrepreneurs are opportunity-minded and open-minded, able to see different points of view and weld them into a unified focus. They rise above national differences to see the big picture of global competition. English is the primary language of global entrepreneurship and they have mastered a working knowledge of others. The global entrepreneur wears many hats, taking on various assignments, gaining experience in various countries, and seizing the opportunity to interact with people of different nationalities and cultural heritages. This chapter has two primary objectives. First, it is a brief on the fascinatingly diverse map of Asia–Pacific countries in terms of their entrepreneurial activity. It’s amazing how different they are one from another (see Figure 12.1). Second, the chapter goes on to describe the actual mechanics of how entrepreneurs go global with their products and services. Let’s look at the diversity of global entrepreneurship in our region. The following subsections on entrepreneurship in countries within the Asia–Pacific region refer to the data shown in Figure 12.1, based on the Global Entrepreneurship Monitor (GEM) data from 2003–2014 and Knoema Data Visualization.4

AUSTRALIA With 11 per cent of the adult population involved in setting up a new business or owning a newly founded business (total entrepreneurship activity, or TEA), Australia ranks second only to the United States among the innovation-driven economies in its rate of entrepreneurial activity. Data clearly show that Australia compares well with other major economies in terms of the ‘quality’ of entrepreneurial activities being pursued. With a low rate of necessity entrepreneurship, Australian entrepreneurs are definitely pursuing opportunities, reflected as well in the ‘good perceived opportunities’ measure. About 70 per cent of Australians believe being an entrepreneur carries a high status. Strangely though, only half believe entrepreneurship is a desirable career choice, perhaps due to the chequered history of criminal entrepreneurs in Australia. (see Online Resource ‘The rise and fall of criminal entrepreneurs in Australia’ and Case 4.1 ‘Australian buccaneer entrepreneur eaten by cannibals’, p. 139.)

414 Part 3: Developing entrepreneurial ventures

FIGURE 12.1

INDICATORS OF ASIA–PACIFIC ENTREPRENEURSHIP, 2003–13

Perceived Opportunities

Perceived Capabilities

Philippines India Philippines New Zealand New Zealand India Australia Indonesia USA Indonesia Malaysia Australia Vietnam Taiwan Vietnam Thailand China Hong Kong Thailand Malaysia USA Korea China Taiwan Singapore Singapore Hong Kong Korea Japan Japan 0% 0% 10% 20% 30% 40% 50% 60% A. See good opportunities to start a firm in the area where they live

40%

60%

B. Believe they have the required skills and knowledge to start a business

Fear of Failure Rate

Desirable Career Choice

Vietnam Philippines Thailand Thailand China Malaysia Japan Taiwan Taiwan Indonesia India India Hong Kong Vietnam Singapore Korea Korea New Zealand USA Philippines Hong Kong Australia Australia Indonesia China Malaysia USA Singapore Japan New Zealand 0% 10% 20% 30% 40% 50% 60% 0% D. Say that fear of failure would prevent them from setting up a business

20%

Entrepreneurial Intention Philippines India Indonesia China Taiwan Thailand Vietnam Korea New Zealand Singapore Australia USA Malaysia Hong Kong Japan 0% 10% 20% 30% 40% 50% 80%

50%

C. Intend to start a business within three years High Status Entrepreneurship

Vietnam Philippines Thailand India China New Zealand Australia Korea Indonesia Hong Kong USA Taiwan Malaysia Singapore Japan 100% 0% 20% 40% 60% 80% 100%

E. Believe that starting a business is a desirable career choice

F. Believe that successful entrepreneurs receive high status

To be sure, only 11.8 per cent of Australians intend to start a business, compared to 46 per cent in the Philippines, or 32 per cent in Indonesia. More than a third of Australians are so fearful that they might fail that they will never start a business (compared to 22 per cent in New Zealand). Another hurdle for Australian entrepreneurs is that relatively few (12 per cent) are internationally oriented, far fewer than, for example, New Zealanders or Hong Kongers. Experts do score Australia high in entrepreneurship education, cultural support for entrepreneurship and internal market-openness when compared with other innovation-driven economies. Beyond this, the conditions for entrepreneurs are favourable. Australia is world ranked in terms of ease of doing business, but the total corporate tax rate is very high at 47 per cent. Australian entrepreneurs also face numerous

Chapter 12: Global opportunities for entrepreneurs 415

FIGURE 12.1

INDICATORS OF ASIA–PACIFIC ENTREPRENEURSHIP, 2003–13 (Continued)

Nascent Entrepreneurship Rate New Zealand Philippines Thailand Indonesia USA Australia China India Singapore Vietnam Taiwan Korea Hong Kong Malaysia Japan 0% 2%

Total Early-Stage Entrepreneurial Activity (TEA)

Thailand Indonesia Thailand Indonesia Philippines Vietnam Philippines China Vietnam China New Zealand Korea New Zealand Australia India USA India Australia Taiwan Taiwan USA Korea Singapore Japan Malaysia Malaysia Hong Kong Hong Kong Singapore Japan 4% 6% 8% 10% 0% 5% 10% 15% 20% 25% 0% 5% 10% 15% 20% 25%

G. Actively involved in setting up a business (less than three months) but have not paid salaries Female Entrepreneurs Indonesia Philippines Thailand China Vietnam New Zealand Australia USA India Malaysia Singapore Taiwan Korea Hong Kong Japan 0%

Established Business Ownership Rate

10%

20%

H. Currently own or manage a new business (not more than 42 months) Necessity-Driven Entrepreneurship

I. Total Early-Stage (TEA) nascent and new business owners International Entrepreneurial Activity

Hong Kong Philippines Singapore China Korea New Zealand Indonesia Hong Kong India Korea Vietnam Taiwan USA Taiwan Australia Japan India Thailand Indonesia Japan USA Philippines Australia Malaysia Singapore Vietnam Malaysia Thailand New Zealand China 30% 0% 10% 20% 30% 40% 50% 0%

J. Females as a proportion of all entrepreneurs

K. Early-stage entrepreneurs who had no other option for work but to start a business

10%

20%

30%

40%

L. Early-stage entrepreneurs with more than 25 per cent of the customers coming from other countries

Sources: Global Entrepreneurship Monitor data from 2003–14, http://www.gemconsortium.org; Knoema Data Visualization, http://knoema.com/GEM2014/global-entrepreneurshipmonitor-2014. Note: Yearly data collection is uneven. Only Japan and US data are from all eleven years. New Zealand participated only 2003–05. Philippines only 2006 and 2013. Indonesia only 2006. Hong Kong only 2003–04, 2007, 2009. The only countries that did not participate in 2013 were New Zealand, Hong Kong and Australia.

compliance hurdles such as local government regulations and rates, difficulty in getting electricity and protecting investors. The federal government does, however, offer a range of programs for business start-up and early stage businesses. In addition, each state government has its own programs.

416 Part 3: Developing entrepreneurial ventures

AUSTRALIA’S YOUNG ‘BORN GLOBAL’ ENTREPRENEURS

ENTREPRENEURSHIP IN PRACTICE

Ruslan Kogan, founder and CEO of Kogan Technologies Now 31, Ruslan Kogan grew up in housing commission flats, and started his first business at the age of 10 by finding lost golf balls, cleaning them and reselling them. He started Kogan Technologies in his parents’ garage in Melbourne with little money, importing electrical goods from China rebranded to the Kogan brand. He is now rated as one of Australia’s leading online retailers. According to BRW, Kogan is valued at $315 million, not bad for a kid from the suburbs.

Janine Allis, founder of Boost Juice Boost Juice Bars is an international chain of retail outlets that specialise in selling fruit juice. Formed in 2000 in Adelaide, Boost now has 250 stores operating in 14 countries including Asia. The company’s future growth will come from expanding into the Asian region. Carolyn Creswell, founder of Carman’s Fine Foods Unbelievably at 18, Carolyn offered up her entire $1000 life-savings to buy out her near-bankrupt employer in Melbourne. Carman’s now exports to over 32 countries. Carolyn did finish an Arts degree, but she has had no formal business mentor or coach, nor has she done any business studies. Alec Lynch, founder of crowd-sourcing site Design Crowd DesignCrowd provides website, print and graphic design services through freelance graphic designers and design studios around the world. Alec started in his parents’ living room and is currently expanding globally, first buying a US company in 2012 and then moving into Asia. DesignCrowd has reported an annual turnover of over $10 million. Matt Barrie, founder of Freelancer This crowd-sourcing site has surpassed $50 million revenue and 4.3 million users. Matt is an Australian technology entrepreneur. In 2014, Smart Company magazine named him the most influential person in technology in Australia. Dr Sam Prince, social entrepreneur Medical doctor, entrepreneur and philanthropist, Dr Sam Prince launched the Mexican restaurant Zambrero Fresh Mex Grill at age 21 while he was at medical school. By 2009 there were 17 restaurants in Australia and the company had generated more than $13.7 million in revenue. Soon afterwards, Prince set up the Emagine Foundation, through which he’s built 15 schools in Sri Lanka and Vietnam and planned 100 more in the Asia–Pacific region by 2014. He was named 2012 Young Australian of the Year for the ACT. Sources: Kogan.com, http://www.kogan.com/au/ruslan-kogan; Boost, http://www.boostjuice.com.au; Carman’s, http:// www.carmanskitchen.com.au/about-us/founder; DesignCrowd, http://www.designcrowd.com.au/about; http://en.wikipedia.org/wiki/ Matt_Barrie; ACT Government Education and Training Directorate, http://www.det.act.gov.au/canberra-public-school-alumni/sam-prince.

NEW ZEALAND Lord of the Rings. What is it about New Zealanders that makes them so bloody innovative? Learn what it takes on CourseMate Express.

New Zealand is a laggard in its entrepreneurial record-keeping. The last time it was measured (in 2005), New Zealand at 17.6 per cent was surpassed only by Thailand and Venezuela. The indigenous Polynesian population, the New Zealand Maori, were every bit as entrepreneurial as European New Zealanders, and had higher rates in some measures. About 25.0 per cent of Maori versus 13.1 per cent of the general population said they expected to launch a start-up in the next three years. Maori entrepreneurs between 35 and 44 years old had some of the highest total entrepreneurial activity rates ever recorded in the GEM survey. About one in three Maori between 35 and 44 years of age was an entrepreneur. Maori women had the world’s third-highest opportunity entrepreneurship rate and only a moderate rate of necessity entrepreneurship. Maori males had much higher rates of necessity entrepreneurship, about five times the rate of the general male population. For New Zealanders, both Maori and non-Maori, in this 2005 survey, wealth creation was not as important as independence.

Chapter 12: Global opportunities for entrepreneurs 417

Nonetheless, conditions for entrepreneurs in New Zealand are top in the world. New Zealand and Singapore generally share the top two positions in the world in terms of ease of doing business. It only takes one procedure and minimal expense to start a business in New Zealand. It is the world’s number one economy in ease of getting credit and protecting investors.

HONG KONG Hong Kong currently has a relatively low level of entrepreneurship, which is surprising considering high levels in mainland China. In Hong Kong, only 3.6 per cent of the adult population is involved in early stage entrepreneurship, a precipitous drop from earlier findings. Its established business ownership is only 3.7 per cent, about the same as Singapore, and the necessity entrepreneurship rate (those who start a business because they have no other choice) is relatively high. Only 7.3 per cent of Hong Kong adults intend to start a business, again second lowest after Japan. Only one-quarter of Hong Kongers perceive they have the required skills and knowledge to start a business. The rate of female entrepreneurship is also very low, just above Japan. On the bright side, Hong Kong entrepreneurs are very internationally oriented. These low levels of entrepreneurial activity are in sharp contrast to the excellent rank that Hong Kong has in the general environment for business. Hong Kong ranks just after New Zealand and Singapore as the easiest economy to do business in the world. Trading across borders is highly streamlined in Hong Kong, as is contract enforcement, investor protection and taxation (at 22.8 per cent one of the lowest business taxes in the world). A freer China would produce and attract more entrepreneurs. Instead, Hong Kong is faced with the spectre of increased regulation and interference from Beijing. China’s policies dissuade many entrepreneurs and have a chilling effect on Hong Kong’s entrepreneurship.

INDONESIA By some estimates, Indonesia will overtake Germany and the United Kingdom by 2030 in size of the economy.5 As an efficiency-driven economy, it is difficult to say when it will reach the stage of innovation-driven economy. About 90 per cent of all Indonesian firms are micro-enterprises, typically informal, low-tech and specialised in trade and service industries, generally ‘trading on the margins’, and battling government intervention and corruption.6 Nonetheless, by some measures Indonesia scores the world’s highest in being ‘entrepreneur-friendly’, in ‘innovation and creativity are highly valued’, in ‘entrepreneurs are highly valued’ and in ‘people with good ideas can usually put them into practice’, even ahead of the US.7 According to the World Bank’s ‘Doing Business’ assessment,8 it’s a hard slog for entrepreneurs in Indonesia due to compliance. Just starting a business takes 52 days and costs one-fifth of an annual salary. Total tax rate is relatively low at 31 per cent of profit, but count on 253 hours to prepare it! And don’t get involved in contract disputes in Indonesia: it will involve 40 different procedures, 471 days of time and cost more than the claim. At 25.5 per cent of the adult population, Indonesia has Asia’s highest rate of total entrepreneurship activity (TEA), and second-highest rate of established business ownership.9 Furthermore, it is notable that both men and women are equally likely to be engaged in entrepreneurial activity. The average entrepreneur in Indonesia has at least secondary education, income in the low-to-middle range and is working mostly in the trading and services sector. Indonesia is also distinguished in its high perceived opportunities; high level of perceived capabilities; lack of fear of failure; and seeing entrepreneurship as a desirable career choice. The biggest enabler is the dynamic internal market; the main constraint is a lack of government support for entrepreneurial programs. Of these measures, the only cause for concern is the high level of necessity-driven entrepreneurial activity which suggests

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that lower income levels and/or poor employment opportunities are responsible for driving entrepreneurial activity rather than an environment of abundant opportunity for entrepreneurship.

MALAYSIA Indonesia’s closest neighbour is a totally different case. The Malaysian government must be disappointed in its entrepreneurial performance. While the economy has the finance and physical infrastructure to support entrepreneurship, at only 6.6 per cent TEA, Malaysia has Asia’s lowest rates of entrepreneurial activity (aside from Japan). The average entrepreneur in Malaysia is likely to be 35–44 years of age, more likely to be male than female, with an upper secondary level of education and a mid-range household income. Only 11.8 per cent per cent of Malaysian adults intend to start a business. Malaysians are also low in believing they have the skills and knowledge to be an entrepreneur. Malaysia has Asia’s lowest rate of ‘status for entrepreneurs’ and for ‘desirable career choice’. Malaysian entrepreneurs, such as they are, have low international horizons compared to Indonesia, not to mention Singapore. Yet, the country has a forward-looking entrepreneur-friendly national policy. Indeed, the conditions for entrepreneurship in Malaysia match or better those found in other efficiency-driven and even some innovation-driven economies. However, other factors such as bureaucracy and poor education and training have impeded entrepreneurial growth. On a positive note, the fear of failure rate among Malaysians has fallen from 65 per cent in 2009 to 33 per cent in 2014. On the plus side, the government has pared down the compliance procedures considerably. There are only three steps to register a business. Cross-border trade is highly streamlined and it is relatively easy to get credit. Malaysia is world-class in ‘ease of doing business’. The Malaysian government is leading a strong initiative in promoting entrepreneurship, and particularly nurtures ethnic Malays (or Bumiputras) in order to address the social and economic inequities resulting from the previous colonial policy. Positioning middle-class Malays as the main agents of economic growth (while discriminating against the Chinese entrepreneurial classes), the government has tried to adopt a variety of supporting mechanisms and policies for Malay entrepreneurs, including funding, physical infrastructure and business advisory services. Malaysians who are turning novel ideas into new businesses are strongly supported by government which had set the ambitious goal of having smalland medium-sized enterprises comprise 40 per cent of Malaysia’s gross domestic product (GDP) by 2015.10 The low levels of entrepreneurial propensity as well as activity as compared to other efficiency-driven economies is indicative that the entrepreneurial programs initiated have yet to bear fruit and will require greater efforts in the short term. Entrepreneurship education, which is slowly being introduced, will need to be accelerated, its quality improved and importance stressed.

PHILIPPINES The Philippines is a highly entrepreneurial economy; nearly a fifth of all Filipinos could be counted by the GEM definition. The average Filipino entrepreneur is young, 18–34 years old, married with at least secondary schooling. Filipinos respect their entrepreneurs and consider it to be a desirable career choice (the highest in Asia). Significantly, these inwardly focused necessity entrepreneurs have a large proportion of females. More than half (53 per cent) of all Filipinos have a very positive view of the entrepreneurial opportunities in their country; furthermore, 70 per cent believe they have the entrepreneurial capabilities needed to start a business. Filipino entrepreneurs see owning a business as a path to being independent as well as the opportunity to earn a living and improve one’s economic lot. But all this entrepreneurial activity is driven by the highest necessity rate in Asia; 45 per cent of Filipino entrepreneurs have launched their businesses because they have no better choice.

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The main reason for this amazing entrepreneur spirit is poverty. Very little of this energy is directed internationally. Entrepreneurs lack financial support and working capital, hindering business expansion; and there is little training aimed at expanding and sustaining businesses. Challenges for Filipinos include a lack of research and development (R&D) infrastructure, lack of access to technology and especially lack of financing. And this fervent entrepreneurial spirit also confronts considerable challenges when it comes to compliance and regulations. The Philippines is in the world’s bottom rank in ease of starting a business where it takes 16 different signatures. Another disincentive is the country’s high taxation rate (42.5 per cent).

THAILAND Thailand is an economy of some superlatives. Its nascent entrepreneurship rate and established business rate are very high. Its TEA rate is among the highest in Asia at 19.8 per cent. This reflects Thais’ perception of opportunities, which is right up there with the USA, Indonesia and the Philippines. The average entrepreneur is between 25 and 54 years of age, with the majority (nearly 60 per cent) engaged in entrepreneurship when they are between 35 and 44 years old. However, belief in their skills and knowledge and their intention to start a business is only mid-rank. Quite troubling is that half of the Thai population are so fearful of failure that they would never start a business. While 45 per cent of adults in Thailand see good opportunities to start a business, 49 per cent of Thais would be prevented from doing so by fear of failure. Nonetheless, three-quarters of Thais see becoming an entrepreneur as a desirable career choice, and one with high status. The major enablers in Thailand include the dynamic internal market, favourable cultural and societal norms that support high female rates; and access to physical and services infrastructure. Entrepreneurship in Thailand is highly constrained by the lack of financial support, government policies, education and training, and the general capacity for entrepreneurship in terms of innovation and creativity. Financial constraints include a general lack of funding for start-ups and small businesses. Educational quality is seen as poor, which hinders creativity and the development of leadership skills; practical teaching and the teaching of entrepreneurial concepts is lacking. Fortunately, entrepreneurs find a relatively mild compliance environment in Thailand. Registering a business is easy and construction permits are easily obtained, as is registering property and getting credit. The total tax rate is only 27 per cent and export procedures are very quick. Cultural aspects of entrepreneurship are important in Thailand because many entrepreneurs come from Chinese or part-Chinese families. Their entrepreneurial spirit has helped expand entrepreneurial activity and speed up the economic development process. Thai entrepreneurs benefit from the hard-working values of Confucianism but also the Buddhist belief in tolerance of failures.11

CHINA Generally, entrepreneurial activity in China has increased over the last decade. The average entrepreneur in China is male, 25–34 years of age, with a high school level of education. He is more likely to be opportunity-motivated and engaged in the customer service industry. The TEA rate has increased from 12.3 per cent to a 16 per cent 10-yearly average. The rate for females was 14 per cent, ranking it in the second tier. Chinese experts rate their entrepreneurial ecosystem relatively high compared to its neighbours. Cultural support, research and development (R&D) transfer and internal market dynamics are well regarded, but professional and commercial infrastructure is lower than its neighbours. Many Chinese entrepreneurs say they face barriers, and their entrepreneurial activity is largely necessity-driven rather than being opportunity-driven. Chinese also are likely to say that they

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have had an idea to start a business and 28.7 per cent of Chinese adults intend to start a business within three years. Fewer Chinese see good opportunities to start a business or perceive they have the required skills and knowledge to start a business than their Asian neighbours. Chinese seem pretty fearless too: only 30 per cent say that fear of failure would prevent them from setting up a business. Also astounding is the fact that 70 per cent say starting a business is a desirable career choice, and 73 per cent say successful entrepreneurs receive high status. The major problem for entrepreneurs in China is the compliance costs. China stands at rank 128 in the world in terms of ease of doing business. Getting electricity will cost 4.5 times per capita income. It also falls down in protecting investors and compliance costs in trade across borders. The Chinese adult population is relatively modest in terms of perceived capabilities to start a new business.

INDIA Indians enjoy a very entrepreneur-friendly environment. A new India that is young, entrepreneurial, skilled and competitive is emerging and foreign investment continues to increase. GEM reported in 2013 that TEA in India increased to 10.7 per cent from 8.6 per cent in 2007, but this is only mid-rank in Asia, and its rate of necessity entrepreneurship is high. There are more early-stage entrepreneurs in the 25–34 age group than any other age range. Indian entrepreneurs have low horizons in considering international opportunities. Yet Indians are highest in Asia in perceiving opportunities for starting a business and in the top three for having the skills to do so. Being an entrepreneur in India carries a high status. Gender differences exist, with male participation representing about threequarters of the total of entrepreneurs. The lower participation of women in entrepreneurial activity may be attributed to a societal predisposition towards men being more risk-taking than women. Where India falls down is in the extraordinary compliance and bureaucracy which its entrepreneurs must endure. It ranks in the lowest quartile of the world in ease of doing business, starting a business, taxation and contract enforcement. Just getting electricity in India costs nearly five times the per capita income! Its only bright spot is the protection it offers investors. Entrepreneurs in India are hindered by government regulation and lack of entrepreneurial education, according to GEM. The major enablers are India’s dynamic internal market and access to infrastructure such as communication, utilities, transportation and land.

JAPAN Japan is Asia’s basket case of entrepreneurship. At an astoundingly low rate of 3.5 per cent, Japan has the lowest rate of entrepreneurial activity, although this has increased from 1.5 per cent in 2004. The average entrepreneur in Japan is over 45 years of age, male and has a bachelor degree. He starts up his business in the industry where he worked. Japanese demonstrate the lowest levels of perceived opportunities and capabilities in comparison to the reference groups. Most conditions for entrepreneurs are assessed rather negatively. Cultural support for entrepreneurship appears to be the biggest concern. Only 8.9 per cent of Japanese (lowest in the world) see good opportunities to start a firm in the area where they live, while only 13.4 per cent believe they have the required skills and knowledge to start a business. Forty-two per cent say that fear of failure would prevent them from setting up a business. Only 2.5 per cent (world lowest) of Japanese adults intend to start a business within three years. Twenty-eight per cent say starting a business is a desirable career choice, and 52 per cent say successful entrepreneurs receive high status. While getting electricity, enforcing contracts and resolving insolvencies are relatively painless, the tax rate is one of the world’s highest at 51.3 per cent.

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KOREA South Korea’s TEA rate is 7.5 per cent (mid-rank by innovation country standards), but its entrepreneurial profile is quite different from other innovation-driven economies. The typical Korean early stage entrepreneur is male, 35–44 years of age, with a high level of education and a household income in the middle to upper third of the population. Perceived opportunities and perceived capabilities are much lower than comparative groups, and necessity-driven entrepreneurship is higher. Korea does have good physical infrastructure and internal market dynamics, but the professional and commercial sectors are weak. National policy regulations and government programs support entrepreneurial activity relatively well. However, only 36 per cent of Koreans (Asia average is 35 per cent) see good opportunities to start a business, while 32.2 per cent (Asia average 43) believe they have the required skills and knowledge to start a business. Thirty-six per cent say that fear of failure would prevent them from setting up a business. Even though 51.7 per cent give entrepreneurs high status, only 28.8 per cent say it is a desirable career choice. Only 13 per cent of Korean adults intend to start a business within three years. On the reverse side, Korea is a great place to do business. It ranks fifth in the world in terms of ease of doing business. The taxation rate is only 32.4 per cent, investors are protected, contracts are enforced and insolvency is streamlined. The biggest enablers of entrepreneurship in Korea are good physical infrastructure, effective government policies and market dynamics. The biggest constraints are education and training (primary and secondary education in particular), commercial and service infrastructures and financial support.

SINGAPORE Singapore, due to its strategic location, top-notch infrastructure and political stability, is regarded as the friendliest place in the world to do business. The Singapore government has been providing startups with substantial support, including office space, training, mentoring and incubation programs, along with tax and funding incentives. All of this makes it curious that Singapore’s rate of established business ownership is the lowest in Asia – due probably to the number of huge corporations squeezing out small business. Nonetheless, Singapore’s entrepreneurial profile is in some ways comparable to other innovation-driven economies. While its 10-year rate of entrepreneurial activity at 7.4 per cent is mid-range for those economies, there is a definite upward trend. Singapore’s 2013 rate was 10.7 per cent compared to 4.9 per cent in 2003. Yet, Singaporeans have a low faith in their perceived entrepreneurial capabilities. The institutional support for entrepreneurship in Singapore exceeds other innovation-driven economies, especially in government programs, policies, regulations and physical infrastructure. These excellent conditions compete with the low rates in entrepreneurship as a career choice and Singapore is second-worst behind Japan in its high status. So it is a mixed bag for the island nation, especially since it is ranked top in the World Bank’s Doing Business index, especially in trading across borders, contract enforcement, permits and compliance, and investor protection.12

TAIWAN With 8 per cent of the adult population counted as entrepreneurs, Taiwan’s entrepreneurial activity is quite on par with other innovation-driven countries such as Singapore and the United States. Its international orientation, necessity rate and proportion of female entrepreneurs also are similar to these countries. More than a quarter of respondents indicate an intention to start a business within the next three years. On this measure, Taiwan is a leader among the innovation-driven (most developed) economies. Curiously, Taiwan has a relatively high rate of fear of failure (on a par with

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Japan and Malaysia), yet entrepreneurship is considered a desirable career choice. The biggest enablers of entrepreneurship in Taiwan are positive cultural and social norms, good access to physical infrastructure and strong support of female entrepreneurship. The constraints on entrepreneurship are inadequate education and training at primary levels, and inadequate commercial and services infrastructure.

VIETNAM Vietnam has experienced spectacular development in the twenty-first century largely due to Vietnamese entrepreneurs. The rate of established business ownership is 16.4 per cent, greater than the average for the Asian region and third highest in the Asian rankings. The proportion of the adult population that can be counted as entrepreneurs is 15.4 per cent, similar to China and just behind the leaders Thailand and Indonesia. Sixty-three per cent believe that being an entrepreneur is a desired career; and 82 per cent agree that successful entrepreneurs usually earn high social status and respect from others. However, perceived business opportunities are scarcer than in other economies. This has led to a decline in the number of those with entrepreneurial intentions – only one-quarter of adults (mid-rank) intend to start a business in the next three years. That means that the rate of nascent entrepreneurship (when individuals are at the initial stages of setting up their business) is low in Vietnam – 4 per cent, or half the rate of its neighbours. Vietnamese entrepreneurs are generally 25 to 54 years of age, and are more likely to be male than female. They often come from a higher income background, have a university degree and actively seek out business opportunities. They are often supported by their family in their business activities, which tend to be in the consumer service sector. Culturally, there is a positive perception of entrepreneurs and the role of women is increasingly valued by society. In terms of constraints, 57 per cent of Vietnamese would be prevented from starting a business due to fear of failure; that is the highest rate in Asia. In terms of business conditions, Vietnam is definitely in the low-to-moderate rank globally according to the World Bank.13 Just starting a business requires 10 different signatures; meanwhile most businesses never register. Getting electricity in Vietnam costs more than 14 years of per capita income! Tax compliance is highly costly both in time and total tax rate (41 per cent). Vietnamese entrepreneurs also face problems accessing credit and highquality human resources. This hinders business development, particularly affecting small and medium enterprises (SMEs), which make up more than 95 per cent of Vietnamese businesses. Meanwhile, SME support policies are neither comprehensive nor effective.

HOW SUCCESSFUL CHINESE ENTREPRENEURS REALLY THINK Successful Chinese entrepreneurs constantly examine their business operations from every angle. They pay attention to the finest details and agonise over past mistakes with a view to not repeating them in future. They are voracious learners: from textbooks as well as business mentors. In particular, they fastidiously study what their opposition is up to with a view to IN PRACTICE copying best practices. Top Chinese entrepreneurs also spend much time listening to other people: to their customers and staff – including those who have left the business. This is so in order to continually improve their business activities. These are some of the key characteristics identified in a study by Thomas Wing Yan Man at Nottingham University. The study’s findings lend weight to theories that entrepreneurs do indeed learn to become entrepreneurs and are continually working on improving their entrepreneurial prowess through an active process of learning and reflection.

ENTREPRENEURSHIP

cont.

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cont.

‘Learning is a key characteristic of a successful entrepreneur. They are highly motivated in seeking learning opportunities. They learn selectively and purposefully and they learn in depth.’ Many believe that successful entrepreneurship is largely a combination of growing up in an environment that provides opportunities to observe successful business operators, street-smart intelligence and luck. But, it seems that some of China’s best business players look to textbooks for advice. ‘Successful entrepreneurs involved in our research actively participate in training courses and look for management practices and ideas from others and from text books. They analyse how to apply certain management theories in their own businesses.’ The study identified six main patterns of learning common to Chinese entrepreneurs: they actively seek learning opportunities, they learn selectively and purposefully, they learn in depth, they learn continuously, they improve and reflect on their experiences and they transfer their learning outcomes to current practices. Source: Thomas Wing Yan Man, ‘How successful Chinese entrepreneurs really think’, China Daily, 5 January 2012, Copyright ª 2012 China Daily. http://www.chinadaily.com.cn/opinion/2012-01/05/content_14383349.htm.

HOW DO I ACTUALLY GO GLOBAL? Having reviewed the levels of entrepreneurial activity in the various countries of the Asia–Pacific region, we turn now to concrete steps that an entrepreneur can take to go global. Research literature has traditionally focused on patterns that companies can go through when they go offshore (by offshore, we also mean neighbouring countries). One is described as an incrementalist approach to export and expansion. This sees firms moving through a specific sequence of events, starting out with no offshore activity, then employing intermediaries and finally setting up subsidiaries or agents. The second approach stands conventional theory on its head. Firm internationalisation has traditionally been conceptualised as a gradual and sequential process that occurs in stages. The firm is assumed to build a stable domestic position before successively increasing commitment to international activities and foreign markets. Recent research has shown changed attitudes towards this process. Today the focus is on small firms that begin exporting right from start-up. These are called ‘born global’ firms, who are exporters from the get-go.14 Without the advent of global communications and transportation, they simply would not exist. Think of the giants Google and Facebook, which generated export revenues at impressive speed. Think also of the small entrepreneurs like Skype, that was acquired by eBay and then by Microsoft. Young entrepreneurs – especially those with a gap year or two under their belts – tend to move quickly towards international and global markets where resources are more easily and widely available.15

WHAT ARE YOUR MOTIVATIONS FOR GOING GLOBAL? The first question you should ask is: Why should I go global in the first place? An entrepreneurial business should be able to answer ‘yes’ to many of the following questions. • Profit maximisation: Is the company driven by a need to maximise profits? Are shareholders or investors expecting quick returns? This might mean adopting an opportunistic strategy in which the company moves from market to market in search of the best possible returns, rather than slowly building a position in any particular market. • Market share: Does the company want to establish a strong position in an undeveloped market? Is it willing to charge less initially (penetration pricing) in order to get buyers? This may mean spending more on advertising and marketing and having less concern with shortterm profitability. This strategy works best in a market where demand is strong (or can be

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stimulated with appropriate marketing) and where competition, particularly from local suppliers, is weak. • Maximising cash flow: Another strategy may be simply a way of maximising cash flow. Firms strapped for cash may go abroad to bring in more revenue. This may be the case, for example, for companies that have large stocks of unsold or discontinued inventory or with idle production capacity. • Repositioning the business: Global market entry may help an entrepreneurial firm reposition a business by developing new product lines and new capabilities. It may make more sense to roll out a different product in a new market, where the company is relatively unknown, than attempt to change the company’s image in its original market, possibly undermining its existing business in the process. • Domestic impact: Aggressive firms may go overseas in order to acquire new knowledge, skills or technologies for their domestic operations. Such strategies are often pursued by companies in technology-intensive industries or in sectors undergoing rapid change. The entrepreneur can actively engage in the international market in many ways. These include: importing, exporting, joint ventures, direct foreign investment, royalties and licensing, franchising, mergers and acquisitions, and greenfield investment. These are all becoming part of the extended enterprise, but each of these methods involves increasing levels of risk. The final decision whether or not to go global will depend on the organisation’s needs and the risk it is willing to take. The ‘Market selection matrix’ exercise at the end of the chapter is a useful tool for assessing opportunities in different market contexts.

IMPORTING AND GLOBAL SOURCING Importing is buying and shipping foreign-produced goods from foreign sources. That’s the traditional definition. Entrepreneurs trade because it enables them to acquire goods they cannot produce themselves. But today, importing is called global sourcing, which means sourcing goods and services across geo-political boundaries. This means spotting global efficiencies in the delivery of a product or service. These efficiencies include low-cost skilled labour, low-cost raw materials and other economic factors such as tax breaks and low trade tariffs. Global sourcing makes it possible to meet an increase in product demand. There is also an issue of quality to consider. Some countries have a reputation of producing high quality products with high reliability that are sought by others. Another issue to consider is the penetration of growth markets. An entrepreneur may get a foothold in a new country by sourcing in that country. Last, but not least, is the issue of cost. Buying abroad is sometimes cheaper than domestic buying. Of course, there are disadvantages as well, particularly relevant to businesses dealing in physical goods. There are extra cost factors and time factors, such as travel and communication. A foreign broker’s and an agent’s fees must be paid. Then there is the cost of distribution, which adds hugely to the unit cost. One illustration of ‘importing talent and production’ is called near-shoring, which means moving jobs to a nearby foreign country. It is part of the ‘X-shoring’ constellation of terms that include: offshoring (sending work to an overseas location), multi-shoring (sending outsourced work to several overseas locations based on the job to be done and the relevant skills available) and twoshoring (using an offshore location and a domestic one). Near-shoring brings many direct material

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benefits. It allows a firm to upsize or downsize and to spread risk to other parts of the production chain. Wage and costs differentials in near-shore countries make the company more competitive in the home market. Nearby countries may have higher quality workers and multilingual capabilities. Rather than extend operations to a country around the world, near-shoring can reduce costs and time to market because of the proximity to the home market. How does an entrepreneur become aware of import opportunities? Knowing where to look is sometimes the hardest part of importing. A starting place is your own knowledge of world trends in your industry or existing market, your intuition about likely new markets – and your facility with using the Internet. Thinking of becoming an import entrepreneur? As this book goes to press, the top entrepreneurial import opportunities in Australia are GST-free under $1000: • Computing and electronics: Major retailers have been gouging this market, so why not you? The top import opportunities here include in-car entertainment systems, portable gaming and media devices, smart phone application accessories, e-book and iPad alternatives. • Appliances: There are plenty of quality brands overseas and that means opportunities to secure distributorship agreements. This includes stoves and cooktops, rotisserie ovens, outdoor gas heaters and barbecues, robotic vacuum cleaners. • Clothing: Popular selling products suitable to online stores include custom design cycling jerseys, custom design sporting uniforms, 100 per cent cotton men’s business shirts, embroidered corporate shirts and work wear.

EXPORTING On the flip side is exporting: shipping and selling locally produced products and services abroad. Free trade agreements open up all sorts of markets to entrepreneurs with the right products. Every globally active entrepreneurial seller is an exporter of some kind. This is particularly important for countries of the Asia–Pacific. Obviously every country has its export advantages. Exports can be commodities such as wood and meat products, manufactured goods such as electronics or automobiles, knowledge products such as software or video, services sold to foreigners or even education sold to international students. Exporting is important for entrepreneurs because it often means increased market potential. Instead of being limited to a small market, the exporting company has a broader sales sphere. Take Australia as an example. Australian exports to China have grown at a steady rate. Sectors that are benefiting are agriculture, manufacturing, minerals and energy and services. Australia’s export advantages to Malaysia would be dairy and horticultural products, halal meat, seafood, fruits and wine (yes, even to a country where Islam is the official religion). Increased export sales volumes will lead to lower unit costs, which will lead to increased margins and profits. As more and more units are exported, the company becomes more efficient at production of the units, thereby lowering the cost per unit. The lower unit cost therefore enables the firm to compete more effectively in the marketplace.

Indirect exporting Exporting to foreign markets takes two forms. Direct exporting means setting up expensive subsidiaries or establishing contractual relationships with foreign companies. Direct exporting does give greater control over sales channels and intellectual property protection, but the entry costs, time to market and ongoing costs are higher.

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The other form is indirect exporting, which means selling goods to foreign buyers through third parties such as export agents, export merchants or buying houses. This is an especially good mode of entry for the novice exporter or for a manufacturer who lacks country knowledge. Doing business in China is a good example. Many exporters do not have the expertise to enter the Chinese market successfully. However, when they use indirect exporting, they offer their products through intermediaries who take the product directly to the markets. This way, time to entry in the Chinese market is shorter and more flexible. Exporters can receive payment earlier and risks are minimised, particularly involving volatile foreign exchange markets and credit risks. One of the greatest benefits of indirect exporting is the ability to obtain export know-how and personal contacts through the export merchant or agent. The exporter can possibly realise greater sales volumes since the foreign export agent often represents several different related products or product lines and can therefore deliver on economies of scale. As well, exporters find it easier to ascertain whether their products will sell well in a foreign market without the effort, financial investment or risk associated with direct exporting. They do not have to worry about all the complexities; they merely give instructions to the agent about packing, labelling, transportation and so forth.

Strategic alliances All of the following methods comprise various forms of the strategic alliance. The term encompasses everything from informal agreements to share information all the way to joint ventures. In short, a strategic alliance is any formal relationship, short of a merger or acquisition, between two companies, formed for the purpose of gaining synergies. In the new economy, strategic alliances enable business to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. Teaming up with others adds complementary resources and capabilities, enabling participants to grow and expand more quickly and efficiently. Fast growing companies, especially, rely heavily on alliances to extend their technical and operational resources. In the process, they save time and boost productivity by not having to develop from scratch. Thus, they are freed to concentrate on innovation and their core business.16

Export management company Another way to get into exporting is through an export management company, also known as a trading house. An export management company is a private firm that serves as an export department for several manufacturers. The company solicits and transacts export business on behalf of its clients in return for a commission, salary or retainer plus commission. In addition, some export management companies will purchase the product and sell it themselves to foreign customers. Export management companies can facilitate the export process by handling all of the details – from making the shipping arrangements to locating the customers.

Foreign distributors There are quite a few similarities between foreign distributors and the trading house. It is also quite like indirect exporting (above). The producer also has to take care of all of the barriers to market entry before the products arrive at the distributor. Of course, this can be arranged differently. Apprehensive exporters can offer their products ‘ex works’ – in effect selling them at their factory gate. That means all of the formalities fall to the distributor. On the negative side, the distributor relationship means the producing firm can lose control over marketing, sale and delivery. The goods

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may even be totally repackaged, relabelled or repositioned to suit the distributor rather than the exporter (unless specific provisions are included in the agreement). This means that a fruitful and productive foreign distributorship can have some characteristics of a strategic alliance or even a partnership.

Foreign agents An ‘agency agreement’ with a foreign agent is a step forward from these previous forms of market entry. Here the producer retains title until the goods are delivered to the buyer or even to the consumer. A new agent starts out on a low salary and commission. As sales increase, so do commissions. It is generally the exporter’s responsibility to pack and ship the goods, clear them through customs and deliver them to the agent. This means that the producer/exporter assumes direct responsibility for most of the steps in the distribution chain. A good agent can also be extremely helpful in dealing with some of the procedures involved and is better placed to understand any duties, taxes or ‘tips’ owing on the shipment. In rare instances the exporter may deal directly with a foreign customs broker – usually if the goods must be stored for future distribution.

Setting up a local office Beyond agents, the next route to global market entry is setting up a small office in the overseas country you are targeting. Usually firms send over one or two people with specialist language or cultural expertise to set up a small office, gather local intelligence, set up a contact network, trial-test new opportunities and carry out marketing and public relations. If things go well, then the staff moves from information gathering to deal making and order processing. This could lead to setting up a full-scale subsidiary in the new market. It is important to work with trade delegations from your home country that have offices in the target country. They have experience, specialist expertise and, most importantly, the contact network to help your venture.

Contract manufacturing Contract manufacturing means that a contractee/manufacturer assembles the product under a contract arrangement. The manufacturer often charges on a per-piece or per-lot basis for the labour required for their services while using components or materials, moulds or detailed manufacturing instructions supplied by the entrepreneur. Sales and marketing of the finished product remain the responsibility of the contractor, not the manufacturer. Firms engage in overseas contract manufacture not to replace domestic production, but as a means of achieving strategic advantages in that country.

Co-production Under co-production agreements, companies agree to manufacture each other’s products. Comanufacturing may be combined with co-promotion or co-marketing agreements (see below). Most such agreements do not involve licences or royalties, but some rights to the product may be worked into the agreement.

Joint production In a joint production agreement, companies cooperate to produce goods. These agreements enable companies to optimise the use of their own resources, to share complementary resources and to take advantage of economies of scale. Companies may cooperate to make components or even entire products. Many foreign engineering firms have entered joint production agreements with

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domestic firms that have manufacturing expertise. In the automobile and telecommunications industries, competing firms often form an alliance to make components that they all need and use.

Retail outlet Beyond this comes the network of retail outlets as volume increases. Some are owned and operated by the parent company or could be dealerships that have an exclusive relationship to the parent. This gives the parent company direct control over the whole distribution chain from initial production to final sale. One of the huge additional benefits is that the parent company can monitor customer behaviour. On the negative side, though, it means hiring, training and firing sales staff, managing inventory, navigating local laws and operating the outlets.

Co-marketing Co-marketing, also known as co-promotion, means two or more companies cooperating to market or promote each other’s products. This type of alliance can involve cross-licensing a shared promotion campaign, or even the formation of a joint venture to market products. For a company wanting to enter a new market, a co-marketing agreement is an effective way to take advantage of existing distribution networks and an ally’s knowledge of local markets. It allows firms whose products complement each other to fill out a product line while avoiding expensive and timeconsuming development.

Export consortium The most common form of an export consortium might involve a joint bid by several small firms to bid on a foreign project. For a large-scale project, this is the only way that small firms can reach a threshold of size and credibility to complete the assigned task. Much smaller ventures might also require a diversity of skills. Consortia can be informal, but they work better if there is some common agreement that defines the group’s objectives.

JOINT VENTURE What to know before you reach a joint venture agreement. Go to CourseMate Express to check out this checklist.

A joint venture (JV) is a business collaboration in which two or more parties (with one or more potentially being an international firm) establish a new business enterprise to which each contributes and in which ownership and control are shared. There are good business and accounting reasons such as distribution, technology or finance to create a joint venture. One is that the firm would be able to gain an intimate knowledge of the local conditions and government where the facility is located. It provides the opportunity to obtain new capacity and expertise. Another benefit is that each participant would be able to use the resources of the other firms involved in the venture. This allows participating firms a chance to compensate for weaknesses they may possess. It is important to consider certain factors before forming a joint venture. These include: • prospective partners should be screened • joint development of a detailed business plan and a shortlist of a set of prospective partners based on their contribution to developing a business plan • due diligence – checking the credentials of the other party (‘trust and verify’ – trust the information you receive from the prospective partner, but it’s good business practice to verify the facts through interviews with third parties) • development of an exit strategy and terms of dissolution of the joint venture • most appropriate structure (for example, most joint ventures involving fast-growing companies are structured as strategic corporate partnerships)

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• availability of appreciated or depreciated property being contributed to the joint venture (by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners) • special allocations of income, gain, loss or deduction to be made among the partners • compensation to the members that provide services.17 The central characteristic of a joint venture is that it is an equity-based relationship. In a joint venture, two or more ‘parent’ companies agree to share capital, technology, human resources, risks and rewards in the formation of a new entity under shared control. Each parent owns a part of the joint venture and is represented on its board of directors or other governing body. If the ownership of the joint venture is split 50–50, it is usually because the partners are about the same size and both want a large say in the company. A different split usually reflects a difference in the resources committed by each parent. Here are three possible joint venture governance arrangements: • full equality – the parents decide policy and operating matters together • policy equality – the parents must concur on joint venture policy terms, while one takes the lead in operating matters • lead parent arrangement – one parent has the lead on policy as well as operating questions.18

DIRECT FOREIGN INVESTMENT A direct foreign investment is a domestically controlled foreign production facility. This does not mean the company owns a majority of the operation. In some cases, less than 50 per cent ownership can constitute effective control because the stock ownership is widely dispersed. On the other hand, the entrepreneur may own 100 per cent of the stock and not have ‘real’ control over the company because the government dictates whom to hire, what pricing structure to use and how to distribute the earnings. This causes some concern about exactly who is in control of the organisation. Because of the difficulty of identifying direct investments, governmental agencies have had to establish arbitrary definitions of the term. A direct foreign investment typically involves ownership of 10 to 25 per cent of the voting stock in a foreign enterprise. A company can make a direct foreign investment by several methods. One is to acquire an interest in an ongoing foreign operation. This initially may be a minority interest in the firm, but enough to exert influence on the management of the operation. A second method is to obtain a majority interest in a foreign company. In this case, the company becomes a subsidiary of the acquiring firm. Third, the acquiring firm may simply purchase part of the assets of a foreign concern in order to establish a direct investment. An additional alternative is to build a facility in a foreign country. An entrepreneur may want to make a direct foreign investment for several reasons. One is the possibility of trade restrictions. Some countries have prohibitions or restrictive trade barriers on imports of certain products. These barriers can make exporting costly or impossible. In addition, foreign governments may grant tax incentives to a firm seeking direct investment in that country. These incentives can be attractive if the anticipated rate of return is estimated to be higher at the foreign location than domestically. Direct investment can be an exciting venture for small firms making efforts to increase their sales and their competitive positions in the marketplace. However, it is sometimes not practical for a firm to make a direct investment in a foreign location. If the firm has a unique or proprietary product or manufacturing process, it may want to consider the concept of licensing.

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ROYALTIES AND LICENSING A royalty is a payment made in return for being permitted to exercise a right owned by another person. Most commonly, it is allied to the payment made by a publisher or record producer to the author of a book or performer of a piece of music, but it can apply equally to a payment made for producing something by a patented process. This method of distribution is usually entered into when the developer of a product or component does not have the capital, time or commitment to manufacture and market the product/component themselves, or there are substantial tariff barriers to imports in the market of interest. You effectively sell your intellectual property to someone else to manufacture on your behalf, or to incorporate into a product they are already manufacturing. You then receive an agreed amount – a royalty – every time they make a sale. This method is often entered into when a small component has been developed that can be used in other processes – for example, a microchip that can be used in computers. Licensing is a global market-entry tool in which the company enters into an agreement with a licensee in the foreign market, offering the right to use a manufacturing process, trademark, patent, trade secret or other item of value for a fee or royalty. Licensing can cover inventions, technologies, software, manufacturing systems and processes, products and artistic and literary material. The entrepreneur need not make an extensive capital outlay to participate in the international market. Nor does the licensor have to be concerned with the daily production, marketing, technical or management requirements; the licensee will handle all of this. Due to the high cost of manufacture and the comparatively small investment of a licensing program, many of the risks that a company would otherwise face in exploiting its intellectual property are transferred to the licensee. Depending on the exclusivity of the licence, there are varying degrees of risk involved for the licensee and licensor; however, an effective licence strategy will minimise risk for both parties.19 • Advantages of licensing: – It can be an extremely attractive way to enter the international arena. It requires a minimal capital outlay and can generate savings in tariffs and transportation costs. – It is a more realistic means of expansion than exporting, particularly for the high-tech firm. – Access to the market is easier in comparison with equity investments and foreign governments are more likely to give their approval because technology is being brought into the country. – A potential exists for the licensees to become partners and contributors in improving the ‘learning curve’ of technology. • Disadvantages of licensing: – It is possible that the licensee will become a competitor after the contract expires. – The licensor must get the licensee to meet contractual obligations and to adjust products or services to fit the licensee’s market. – The licensing entrepreneur must manage the relationship’s conditions and circumstances, as well as resolve conflicts or misunderstandings as they occur. – The integrity and independence of both the licensor and licensee must be maintained. To be competitive with larger firms, small businesses have to be on the cutting edge of bringing in new and innovative technology. Moreover, some small firms may not have the financial resources available to participate in the international marketplace by exporting, joint venture or direct investment. For many of these firms, international licensing is a viable and exciting method of expanding operations.20

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Before a company considers licensing out its technology, however, it should consider whether other ways of taking advantage of its property, such as joint ventures and strategic alliances with other companies, would better complement its economic position. Once licensing is the chosen direction, the nature of the company, as well as the particular property it wishes to utilise, should be carefully considered before deciding the architecture of the licence.21

FRANCHISING Franchising is a specific form of licensing that involves selling the rights to a complete package of trademarks, processes, technologies, designs and copyrights, as they are all involved in the operation of a specific business. (See the section on ‘Franchises’ in Chapter 5.) Perhaps the best-known franchises are in the fast-food business, with the world leader probably being McDonald’s. Whether it is in North America or Russia, a McDonald’s restaurant promises the same food, the same quality and the same level of service to customers. Moreover, its business formula involves service standards (quick service, a standard menu), an approach to employment (hiring younger people), technology (high-tech ovens, foolproof cash registers), marketing (Ronald McDonald, frequent promotions) and a common look that is reinforced by logos and other symbols. In selling its franchise, McDonald’s provides an entire process, employee training, monitoring of performance, quality control and marketing support as part of the package. Generally, with franchising though, terms of the arrangement vary; the purchaser usually pays a lump sum for the franchise and then remits a percentage of all subsequent profits. The sale of a franchise marks the beginning of an ongoing partnership between the franchise owner and the purchaser that apportions responsibilities in both directions. That partnership may include an agreement that the purchaser buy specific products or supplies from the franchise owner on an exclusive basis. The franchise owner will certainly provide ongoing training and marketing support to the purchaser.

THE PROS AND CONS OF FRANCHISING IN CHINA Foreign franchises must overcome problems that are specific to the China market. •

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ENTREPRENEURSHIP

Intellectual property protection is uneven. Weak intellectual property enforcement and an inadequate legal framework are key reasons early foreign brands opened as companyIN PRACTICE owned stores or JVs, instead of franchises, in China. Many US brands have seen local companies take their name and logo and open fake, unapproved outlets. Local managers lack strong management skills. Franchises in China often experience difficulties finding local managers who understand how to run a business. Training costs are high and so is the rate at which good employees quit to take higher paying jobs after they receive Western business training. Finding and evaluating licensee candidates is tough. Due diligence resources to fully check on a local company are improving, but it is still difficult to find companies with the management skills, business track record and capital to acquire and properly develop foreign-owned franchise business. China has many markets. The sheer size of China, and its diversity of business and food culture, makes franchise development difficult. Companies that function well in one region seldom function as well elsewhere in China.

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The regulatory environment is evolving. The country’s regulatory environment for franchising is evolving and improving, however. The 2005 Administrative Measures on Commercial Franchising allow foreign companies to establish wholly foreign-owned franchises, instead of being limited to joint ventures, thus fulfilling one of China’s World Trade Organization commitments. Franchises must adapt their products to new markets. Some franchises face difficulties in China when they do not adapt – or are slow to adapt – to the needs and tastes of Chinese consumers. Source: Adapted from William Edwards, ‘US companies must jump hurdles to operate successful franchises in China, but the potential benefits are too great to ignore’, China Business Review, 1 July 2011, published by China Business Review, US-China Business Council, ª 2011. http://www.chinabusinessreview.com/the-pros-and-cons-of-franchising-in-china.

MERGERS AND ACQUISITIONS Could ‘Rollups’ infiltrate your industry? On CourseMate Express read about a new M&A strategy taking hold.

Mergers and acquisitions are another way for companies to position themselves in a new market. They can also be important for companies seeking to develop greater economies of scale or to acquire new capabilities. A merger occurs when two corporations join into one, with one corporation surviving and the other corporation disappearing. An acquisition is one company taking control of another, often through an ‘unfriendly’ or ‘hostile’ acquisition. A prospective exporter interested in acquiring a foreign firm would do well to develop a cooperative business relationship with it first. This gives both companies a chance to work out an effective relationship, develop trust and assess the real advantages and disadvantages of a merger or acquisition. The four main reasons for making an acquisition include acquiring: • complementary products in order to broaden the line • new markets or distribution channels • additional mass and benefit from economies of scale • technology to complement or replace the currently used one.22

GREENFIELD INVESTMENT Building everything from the ground up may be the ultimate international market entry strategy. Greenfield investment involves building everything the foreign subsidiary might need. In the past, this was a good way to get around protectionist barriers or to acquire an idle production plant cheaply. These days, this strategy is less popular for two reasons: expense and risk. It’s also much cheaper to outsource the services needed. Greenfield investment also means tying up scarce capital, which leads to being inflexible and less strategically agile.

ETHNIC NETWORKS Carrying on from our discussion in Chapter 4, page 130, another very powerful mode of global entrepreneurship is maximising your ethnic networks. Ethnic entrepreneurs start their own business in their new country of residence often through an individual connection with former immigrants. On the reverse side are immigrant groups who launch start-ups back in their home country. We call them diaspora entrepreneurs. Diaspora comes from the Greek word for ‘dispersed’ and means any group dispersed outside its traditional homeland, especially involuntarily, but who maintain a relationship to their country of origin. In both directions, immigrant entrepreneurs are the new Argonauts, using family and ethnic networks and their bounded solidarity to build close ties between their two homelands. From this perspective, the often-lamented ‘brain drain’ is actually a kind of brain circulation, pushing not only the home economy but benefiting the countries of origin as well. Both ethnics and diasporans confront institutional environments that often are quite different from those that existed in their countries of origin. Both must acculturate. But both have tremendous

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social capital. Immigrant family and friends blend together the performance-based world of business and the emotion-based domain of family. Economic benefits abound in working with your ethnic community. These range from coping with social exclusion, rapid mainstreaming, and providing access to transnational opportunities. Well-known are hyphenate American entrepreneurs such as African-Americans, Korean-Americans and Mexican-Americans, and especially Indian and Chinese engineers who immigrated to California’s Silicon Valley. Participating in ethnic networks of family and friends helps with raising capital at the initial stages of a start-up and reliance on business colleagues and professional associations for finding larger amounts of capital and finding capital at later stages of the firm.

IMMIGRANT AND REFUGEE ENTREPRENEURS IN AUSTRALIA Migrants have enjoyed high-profile business success in Australia. This is a remarkable ENTREPRENEURSHIP achievement given the challenges of transition in a new country. About 30 per cent of small businesses in Australia are migrant-owned, which is similar to the proportion of migrants in the working age population. They have overcome disadvantages through IN PRACTICE determination and hard work, and in the process have created jobs and wealth in Australia. From the earliest days of Australian immigration, Chinese, Greek, Italian and Lebanese immigrants had relatively high rates of entrepreneurship. While many migrants come to Australia to seek employment, others set up their businesses as a matter of necessity due to a lack of English or discrimination in the workplace. While generally less educated than other Australians, they nonetheless have more business experience than their Australian-born counterparts. Immigrants made less use of credit to finance their businesses, and although they started off smaller than the Australian-born owned businesses, they grew faster and were more profitable. They also had a lower failure rate and seemed to be generally more successful in small business than Australian-born entrepreneurs. KoreanAustralians are reputed to have the highest rate of entrepreneurship of any immigrant group in Australia, that is, twice the Australian average. Quite distinct from immigrants are the humanitarian refugees who have come to Australia because they are at risk of, or have experienced, persecution in their home country. Of all refugee-humanitarian entrants, the proportion of owner/managers is 19 per cent, higher than the average for Australian-born individuals at 16 per cent. Some country groups have rates of running a business in excess of 20 or 30 per cent, in particular Eastern Europeans, as well refugees from Lebanon, Iran, Iraq and Somalia. On average, humanitarian refugee women also have higher rates of business ownership than Australian-born women, with rates of 14 per cent and 11 per cent respectively. The usual pathway for them to start a business is to first take up regular employment and use this as a means of building up capital to establish a business later on. Sources: Joint Standing Committee on Migration (2013), ‘Inquiry into migration and multiculturalism in Australia’, 18 March 2013, http:// www.aph.gov.au; Hugo, G. (2011), ‘Economic, social and civic contributions of first and second generation humanitarian entrants, Final Report to Department of Immigration and Citizenship’, May 2011, http://www.immi.gov.au; Collins, J. & Joon Shin (2014), ‘Korean immigrant entrepreneurs in the Sydney restaurant industry’, Labour and Management in Development Journal, 2014, 15; Zolin, Roxanne & Schlosser, Francine (2013), ‘Characteristics of immigrant entrepreneurs and their involvement in international new ventures’, Thunderbird International Business Review, 55(3), 271–84; Peggy Giakoumelos, ‘Heart of the community: Australia’s migrant shopkeepers celebrated’, 8 August 2014, http://www.sbs.com.au/news/article/2014/08/08/heart-community-australias-migrant-shopkeepers-celebrated.

HOW TO BECOME A BORN-GLOBAL ENTREPRENEUR Figure 12.2 illustrates the classic process for an entrepreneur to follow when deciding whether to pursue a global expansion. The following pages summarise the process into five distinct steps. This five-step process begins with research and moves into a feasibility study. From this point, the financial arrangements are secured, the necessary documentation is prepared and, finally, the plan is implemented.

434 Part 3: Developing entrepreneurial ventures

FIGURE 12.2 ANALYSIS OF GLOBAL EXPANSION DECISIONS

Firm decides to investigate foreign markets Go Preliminary analysis of one foreign market

No go

Further exploitation of domestic markets

Go Secondary data search and analysis

No go

Go Primary data survey and analysis

No go

Go Plan entry and operating strategy

Review

No go

Market entry and operation

Consider additional foreign markets

Review and control

Withdraw from foreign markets

Continue or expand operations

Source: Roger D. Blackwell & Kristina Stephan, ‘Growing profits for small business through global expansion’, Small Business Forum, Winter 1990, 55. Copyright ª 1990 by Roger D. Blackwell. Used by permission.

CONDUCT RESEARCH Here are key elements that have to be addressed in any foreign market entry plan. • Macro-level market attractiveness: – Which markets should be given further attention? – Is there a basic need for the company’s product/service? – Are business conditions suitable for the firm’s risk profile and capabilities? • Basic fit: – Is the country receptive to imports of products or services such as those provided by the company?

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– Are there reasons why the product would not be right for this market (for example, climate – sending snowsuits to the tropics), involving infrastructure (for example, reliability of power for electronic goods) and related products (for example, computer software requires an installed base of computer hardware)? Economic environment (market indicators): – What is the relative overall market size (GNP, population)? – How strong/concentrated is the consumer or industrial purchasing power (income distribution, capital expenditures)? – How rapid is overall growth in the market (GNP growth rates, per capita income growth)? Political/legal environment (risk, requirements, regulations): – How stable/risky is the political situation/level of civil unrest and how would this affect trade? – Would government regulations restrict access to certain types of trade, or create excessive burdens for the firm’s entry plans (for example, do they require a certain level of local production)? – Are there tariffs, entry barriers or non-tariff barriers which would either hamper or help market entry of a product from your country (for example, a special trade arrangement such as a free trade agreement could help market entry to the US)? – Are there legal restrictions that would require excessive modification to the product (for example, restrictions on the use or protection of a trademark or brand name, labelling requirements)? Financial environment: – How stable/volatile is the overall economy (for example, inflation, interest rates)? – Are there restrictions on exchanging foreign currency (can the firm be paid in a suitable currency)? – What is the level of general credit availability and payment reliability? Sociocultural environment: – To what degree is language a factor in the company’s ability to do business in foreign markets? – To what degree would the social structure affect/alter the way the firm does business? Market potential/industry attractiveness: – Is there sufficient demand in the latter for the firm’s product or service? – How much adaptation would be needed? – Will demand exceed the cost of doing business? Economic/market considerations: – How will economic factors affect the standardisation of the product or the marketing mix (for example, will product sizes need to be reduced or less choice need to be provided at the premium end to accommodate lower purchasing power)? – How strong is the current and potential demand for this product (for example, what is the market size and growth trend)? – What market segments exist that could create opportunities? – What stage of the product life cycle would the firm’s export be entering? Sociocultural considerations: – Will cultural factors require the firm to change features of its marketing mix? – Will language affect the company’s marketing efforts in the target market? Is there more than one language that must be considered?

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• Competitive considerations: – How strong is the current competition (their size and market share, the quality levels of their product, level of after-sales service, intangible advantages – member of a favoured nation)? – What is the source of the competitors’ products (for example, imported or locally produced)? • Political/legal considerations: – Are there specific tariffs, taxes, duties and/or permits which apply to the firm’s product? – If permits are necessary, would they be difficult or costly to obtain? • Infrastructure considerations: – What are the characteristics of the shipping, transportation, warehousing, distribution facilities and the general level of access to the markets? • Physical/geographic considerations: – Are there specific characteristics that would affect the marketing mix and require adaptation? – What is the internal suitability like? How will it affect the firm’s other operations? – What form of business should the firm adopt (internal/external exporting, indirect or direct exporting, licensing or franchising, technology transfer)? – If the company adopts an external form of exporting (for example, through an agent, distributor, trading house), how does it select the best representative? – How will it manage the representative? What relationship will it have with the representative? What are the legal implications of the relationship? – If it licenses, franchises or transfers technology, how does it find and select the right partner? – What type of payment/credit arrangements would be most suitable? – Is there a solid chance for product acceptance to compensate for the cost of entry and ongoing support?

WHERE TO FIND GOOD FOREIGN MARKET RESEARCH

ENTREPRENEURSHIP IN PRACTICE

Australian Bureau of Statistics

http://www.abs.gov.au

Federation of International Trade Associations, Internet resources for international trade

http://www.fita.org/webindex/index.html

eMarketer

http://www.idcresearch.com

Government trade agencies

http://dir.yahoo.com/Business_and_Economy/Trade/ Government_Agencies

International economics

http://www.helsinki.fi/WebEc/webecf.html

International trade agencies

http://dir.yahoo.com/Business_and_Economy/Trade/ International_Trade_Organizations

LexMercatoria

http://www.lexmercatoria.org

List of central banks around the world

http://www.bis.org/cbanks.htm

Michigan State University, Global Edge

http://globaledge.msu.edu/ibrd/ibrd.asp

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cont.

Philadelphia University, Everything International

http://faculty.philau.edu/russowl/russow.html

United Nations national and international data sources

http://unstats.un.org/unsd/methods/inter-natlinks/ sd_natstat.htm

University of Tennessee, international trade links

http://libguides.utk.edu/business-international

Yahoo’s Internet Statistics and Demographics Surveys

http://dir.yahoo.com/Computers_and_Internet/ internet/statistics_and_demographics/surveys

PREPARE A GOING GLOBAL FEASIBILITY STUDY A feasibility study should be undertaken to determine if the proposed project is capable of being carried out. Figure 12.3 illustrates a format the study can take. The feasibility study is a critical document of the entry procedure in that it helps demonstrate how realistic the project is. Because the first few years in the international markets typically will be non-profitable, it is imperative the entrepreneur have sufficient foresight to look at both the long-term and short-term prospects of the proposal. FIGURE 12.3

I II III IV

FEASIBILITY STUDY OUTLINE FOR GLOBAL MARKET ENTRY

Identification of international project Statement of feasibility Summary and/or conclusion Entry selection (select one method and develop complete program) A Methods of entry 1 Exporting a Pros b Cons 2 Joint venturing a Pros b Cons 3 Direct investment a Pros b Cons 4 Licensing a Pros b Cons B Other considerations 1 Financial considerations a Raw materials b Labour c Tax incentive and allowance

2 Governmental considerations a Stability b Regulations 3 Distribution a Modes of transportation b Channels V Market profile A Overview: target market 1 Population 2 Major cities 3 Language 4 Climate 5 Geography 6 Imports 7 Exports 8 Exchange rate 9 Transportation 10 Communication 11 Business practices 12 Business hours B Society/culture: Background of society C Major demographic factors 1 Income 2 Occupation

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FIGURE 12.3

FEASIBILITY STUDY OUTLINE FOR GLOBAL MARKET ENTRY (continued )

3 Education 2 Return on total assets employed 4 Religion 3 Sales forecast D Political climate: Background D Taxation considerations E Economic climate E Policy on repatriation of profits F Outlook for trade X Labour and managerial considerations G Opportunities and restraints A Organised labour VI Targeted consumer analysis 1 Description VII Legal considerations 2 Bargaining tools A Trade policy B Work characteristics B Registration of company 1 Hours worked C Ownership of the business entity 2 Pay rates D Governmental policy on foreign investment C Recruitment E Industrial property protection 1 Local VIII Risk identification and analysis 2 Expatriate A Financial risk and property/business seizure 3 Third country B Repatriation of capital D Management C Political risk 1 Local 1 Foreign relations with the entrepreneur’s host country 2 Expatriate 2 Governmental stability 3 Compensation IX Financial considerations XI Control strategies A Type of financing for proposed project A Difficulty of international control B Source of financing 1 Distance 1 Internal 2 Diversity 2 World Bank 3 Degree of certainty 3 Other B Centralised versus decentralised C Break-even analysis C Policy 1 Return on investment XII Timetable for implementation

SECURE ADEQUATE FINANCING Exporters naturally want to get paid as quickly as possible, while importers usually prefer to delay payment until they have received or resold the goods. Because of the intense competition for export markets, being able to offer attractive payment terms that are customary in the trade is often necessary to make a sale.23 The following factors are important to consider in making decisions about financing: • the need for financing to make the sale – in some cases, favourable payment terms make a product more competitive • the length of time the product is being financed – this determines how long the exporter will have to wait before payment is received and influences the choice of how the transaction is financed

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• the cost of different methods of financing – interest rates and fees vary; where an exporter can expect to assume some or all of the financing costs, the effect of costs on price and profit should be well understood before a pro forma invoice is submitted to the buyer • the risks associated with financing the transaction – the riskier the transaction, the harder and more costly it will be to finance; the political and economic stability of the buyer’s country can also be an issue.24

BORN GLOBAL SOCIAL ENTREPRENEURS Don’t think for a moment that global entrepreneurship is for the private sector only! Today, no government, company or group, working alone, can solve a major issue. They have to work together. Ageing population, unemployment, mental illness, cutting carbon emissions: solutions to these and many other world problems are being exported, licensed, franchised and sold around the world. All over the world, social innovators are importing and exporting solutions to the most pressing problems facing society today – from fair trade, distance learning, hospices, urban farming and waste reduction to restorative justice and zero-carbon housing. They are driven by the notion of leapfrogging, namely transferring and adapting innovations developed by entrepreneurs in one country to solve the problems in another country. Think about these two types of global social entrepreneur. The ‘exporting social entrepreneur’ is someone who creates a social solution and exports it to other countries. The ‘importing social entrepreneur’ refers to the person or group who identifies a technology, product or service that can fill an important ‘gap’ on their side. The exporting social entrepreneur is motivated to become internationally engaged and wants to open up the solution to the broader world in order to advance their own mission, goals or programs. They can come from for-profit or not-for-profit organisations and they employ business methods aimed at social or ecological impacts. They are introducing new products, services or approaches that drive social transformation. Their financial return is optimised through fees and sales of products and services. The following are examples of activities by exporting social entrepreneurs. • Development Alternatives’ project called Technology and Action for Rural Advancement of India (http://www.tara.in) are now exporting micro-concrete roof tile kits and vertical shaft brick kilns that reduce energy consumption and emissions to the SewaLanka Foundation (http://www.sewalanka.org/) in Sri Lanka. • Waste Concern of Bangladesh (http://www.wasteconcern.org) improves waste recycling in Asia through composting and Integrated Resource Recovery Centres (IRRCs) that provide organic fertiliser, green energy and jobs, while reducing greenhouse gas emissions. It is assisting cities in Sri Lanka, Cambodia, Nepal and Vietnam in replicating their model. • India’s Aravind Eye Hospital (http://www.aravind.org) is a social organisation that is exporting its technology and service to eliminate needless blindness to many countries. Their Vision Kit includes bifocals, prescription glasses, sunglasses, accessories, an eye test sheet and a mirror sold to entrepreneurs from women’s committees, providing them with an innovative business strategy in their area. • The Freecycle Network (http://www.freecycle.org) is a non-profit organisation registered in the US state of Arizona that organises a worldwide network of more than 5000 local chapters aiming to divert reusable goods from landfills.

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SUMMARY Doing business globally is a profitable and popular strategy for many entrepreneurial ventures. For many, it is actually a boom time. We began by examining the Asia–Pacific countries in terms of their comparative rates of entrepreneurship and other factors that make a country or a culture successful in terms of entrepreneurship. Then we looked at the variety of reasons for going global, each with associated risks and challenges. This chapter discussed several ways the entrepreneur can actively engage in the international market. One way is importing, which involves buying goods from other countries. A second way is exporting, which takes a variety of forms. All global strategies involve some form of strategic alliance. For exporters, the export management company, distributors abroad, foreign agents and setting up a local office are important foreign market entry strategies. The global entrepreneur may become involved in contract manufacturing, co-production, joint production, retail outlets, greenfields investments or co-marketing. Another way is using joint ventures. These international arrangements offer many benefits for those looking to establish a presence in the international market. Beyond this is direct foreign investment. Before entrepreneurs take this step, however, it is important they carefully evaluate the associated risks. Royalties and licensing have both advantages and disadvantages. Franchising is an increasingly popular way of gaining a foothold in an overseas market. Mergers and acquisitions were discussed for companies seeking to develop greater economies of scale or to acquire new capabilities. To launch a global entrepreneurial venture, you need excellent research and to conduct a feasibility study. We do not fail to mention that going global is not just for the private sector. Many social enterprises are taking their products and innovations abroad.

KEY TERMS AND CONCEPTS born global co-marketing contract manufacturing co-production cross-licensing diaspora entrepreneurs direct foreign investment export consortium export management company exporting

exporting social entrepreneur foreign agent foreign distributors franchising global sourcing greenfield investment growth rate importing importing social entrepreneur incrementalist approach

Review key terms with interactive flashcards

indirect exporting joint production joint venture licensing mergers and acquisitions near-shoring retail outlets royalty strategic alliance trading house

REVIEW AND DISCUSSION QUESTIONS 1

2 3 4

Of the countries mentioned in the first section in this chapter, which, in your opinion, have the best chances of being successful in the global marketplace? Which have little chance to succeed entrepreneurially? On which measures of the charts in Figure 12.1 are you making your judgement? What is a ‘born-global’ firm? Name three born-global companies that you know. What are the main motivations for going global? How can an entrepreneur become aware of import opportunities?

Entrepreneurship

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5 6 7 8 9 10 11 12 13

Which of the ‘X-shoring’ methods would you use for a call centre? Which for a manufacturer of plastic playgrounds? Which for an IT company? Of what value are an export management company and a freight forwarder to entrepreneurs who are seeking to export goods? How does a joint venture work? What are the advantages of this arrangement? What are the disadvantages? How can a company make a direct foreign investment? How does a licensing arrangement work? What are the advantages and disadvantages of such an arrangement? Would you go into a franchise in China after reading the Entrepreneurship in practice box, ‘The pros and cons of franchising in China’? Do you feel part of an ethnic network? If so, how would you maximise it for entrepreneurial advantage? What are the top ethnic entrepreneurial networks in your community? Name three global entrepreneurship research topics that you would like to undertake. Are importing social entrepreneurs different from business-oriented importers? If so, give some examples.

EXPERIENCING ENTREPRENEURSHIP Market selection matrix This is useful for making comparisons between global opportunities and allows you to weight questions according to importance for your product/service. The following is a fictitious example of the questions a company might ask at the first stage of the market selection process. In the first part of the exercise, the product we are seeking to export is a hair removal cream. We have started by asking some very basic, but relevant, questions, assessing its export potential in five broad regions. The weightings show which questions you decide are the most important in terms of market selection for our product. A weighting of 10 means the issue is twice as important as a weighting of 5. This table has 38 points total score, but you can change the weighting if you wish. You can use any total you want. The key here is in the selection of the questions and the relative weightings. Do you agree with the scores given to North Amerca? Continue with the other regions. Which region has the highest export potential?

PROPORTION FEMALE POPULATION

PER CAPITA GDP

SOPHISTICATION OF RETAIL ENVIRONMENT

Experience this activity online

POSITIVE CULTURAL ATTITUDE TO HAIR REMOVAL

LACK OF TRADE BARRIERS

TOTAL POTENTIAL FOR EXPORT MARKET

Weighting

5

10

3

10

10

38

North America

4

10

3

6

8

31

Asia

5

2

South America

3

2

Europe

4

3

Australia

3

3

Now you pick another export product and fill in all the blanks.

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FACTOR 1

FACTOR 2

FACTOR 3

FACTOR 4

FACTOR 5

TOTAL

Weighting Country/region 1 Country/region 2 Country/region 3 Country/region 4 Country/region 5

CASE STUDIES CASE 12.1 Home again For Jamey Bennett, CEO of the reading lamp company LightWedge, the decision to start manufacturing in China was simple. It came down to money: factories in the People’s Republic could make his products for 30 per cent less than those in the US. Those bargain prices brought other problems, though. One year, two factories, two trading companies and countless headaches later, Bennett, 36, moved his company’s production back to the US. Sitting in his Nantucket, Massachusetts, office, Bennett recalls how his problems began immediately after he picked a trading company in Taiwan and a factory in Guangdong province back in 2002. The reading lamps were simple enough – a thin sheet of transparent acrylic, illuminated by two light-emitting diodes, placed over an open book – but the made-inChina versions never looked quite right; there were problems with the texture and the colour of the acrylic. Each lamp requires two LEDs of the same colour, but because the factory matched them by ‘eye-balling’, some lamps gave off an odd-coloured light. Bennett, a serial entrepreneur who’d already founded two companies, BookWire.com and LendingTree.com, considered those the inevitable snags of a new venture. He wasn’t thrilled, but he was comfortable enough to ship the $34.95 LightWedge Original to customers (and most didn’t notice anything amiss). A few months later, however, when the factory shipped the products late and LightWedge almost missed its first holiday season, Bennett was less forgiving. ‘We could have done 40 per cent more in sales for Christmas,’ he says. ‘We got clobbered.’ For the company’s second product, a reading lamp designed for paperbacks, Bennett tried a different factory, in Shanghai. Unfortunately, he says, ‘it was more of a disaster than the one in Guangdong’. The owners spoke little English and despite an $80 000 investment and months spent tweaking machinery, they never got the product right. The lenses arrived with scratches and a ‘weird goopy material’ on them, Bennett says. Worse, he had more shipping delays. One company that put LightWedges in its May 2003 catalogue couldn’t ship them to customers until September. Anand Sharma, CEO of TBM Consulting Group in Durham, NC, says, ‘China works if you have a long lead time and need things that are very standard’. Bennett declined to say how much the experiment cost him, but LightWedge lost $1.5 million in sales in 2003 because of shipping delays alone. Of course, there were soft costs as well: the documentation and fees became burdensome for his three-person business, the weekly conference calls at 11 p.m. were trying and Bennett – halfway around the world – couldn’t stop by to check on things. ‘There was no way to stay on top of everything with so much other stuff to do,’ he says. ‘It just didn’t work.’ Finally he decided to bring production back home. Today every LightWedge lamp is made in Newport News, Virginia, at a 1500-person plant run by Canon Virginia. (Yes, it’s the US arm of Japanese Canon – welcome to the global marketplace.) Bennett’s production outlays are 30 per cent higher than those in China and getting a US factory set up costs three times as much, but he says it’s worth it – at present. ‘We’d consider going back to China, but I think I made the right decision for now.’ Source: ‘Home Again’, Fortune Small Business, New York, 14(2), March 2004: 60

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QUESTIONS

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What were the trade-offs when Jamey was considering a factory in China? What could Jamey have done to prevent the problems? What factors would he need to have in place to consider going back to China?

CASE 12.2 ‘I did it because I didn’t know that I couldn’t’ That might sound like the sort of line that could get someone in a good deal of trouble, but in the case of New Zealand vegetable exporters, Lance and Kay Peterson, it was exactly that attitude that got their bottled asparagus out of the warehouse and onto the shelves of every supermarket chain in Australia. Lance explains, ‘We’d had some problems getting the product out into the Australian market, so I went to talk to the category buyers themselves. Within six months every one of them was stocking it. When people asked me how I did it, I told them that it was because I didn’t know I couldn’t’. If that makes it sound as if all you need is a gung-ho attitude to crack the export market, Lance will assure you that nothing could be further from the truth. What it does tell you, however, is the importance of doing your homework, making the right contacts and knowing which approach is right in any particular market. Another story from Lance about doing business in Japan exemplifies the very different approach required there. The Petersons’ company, Circle Pacific, is a well-established, very successful Hawkes Bay exporter of asparagus and frozen squash pumpkin – a Japanese diet staple. But cementing a business relationship in Japan can take years. ‘You’re wasting your time if you think you can rush into the Japanese market and score an overnight hit. My Japanese agent and I spent four years talking to one client before he did any business with us.’ ‘If there’s one piece of advice I would give to new and potential exporters, it’s to put the time, money and effort into finding the right agent in that market and work on building that relationship. It can take years, but once you are in, they are extremely loyal to you. I can’t emphasise enough how important it is to show them that you are there for the long haul.’ After 30 years working to grow their family business and expand their markets around the world, Kay and Lance have recently handed over the reins to CEO Jeannette Samundsen. Jeannette worked closely with Giles Pearson from PricewaterhouseCoopers to put a new rigorous accounting and computing system in place, which provides Circle Pacific with the quality of information it needs to do business efficiently and profitably, here and around the world. ‘The great thing about Giles is that he is never satisfied’, says Jeannette. ‘It’s brilliant having someone who keeps asking us the hard questions and who keeps setting the hurdles a little higher. Giles reviews our results and, in particular our margins, every two to three months to ensure that we are actually making the margin that our costings tell us we should be making. In this business there are so many variables and price fluctuations – especially around foreign exchange – we have to have really robust policies and procedures in place to manage the risks and give us the quality of information we need. This last year has been about working with Giles to get our ducks in a row; this next year we’re going to really begin to see the results of that.’ Source: PricewaterhouseCoopers, ‘I Did It Because I Didn’t Know that I Couldn’t’, http://www.pwcglobal.com QUESTIONS

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What does ‘I didn’t know that I couldn’t’ mean to an entrepreneur? Would Circle Pacific have been able to succeed without the help of PricewaterhouseCoopers? What cultural problems do you think Circle Pacific had in Japan?

CASE 12.3 A foreign proposal Australian Edgar Bruning left his job at a major computer manufacturing firm and started his own business, naming it Bruning Computer. Since then Edgar has secured five patents for computer-related equipment. His latest is a computer chip that can increase the speed of most personal computers by 35 per cent. The cost of one of these computer chips is only $8 and the unit wholesales for $135. As a result, Bruning’s profits have mushroomed.

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Realising that everything he developed can be copied by foreign competitors, Edgar entered into contractual arrangements with a firm in Australia, one in Singapore and another in Dubai to market his product. Bruning ships 50 per cent of its production output to these three firms, while the rest is sold to companies in Australia and New Zealand. Edgar recently has been thinking about increasing his production facilities. He is certain he could sell 40 per cent more chips if he were able to make them. Last week Edgar had a visit from the chief executive of a Chinese firm. The company has proposed a joint venture between itself and Bruning. The venture would work this way: Bruning would ship the company as many chips as are currently sent to the three other firms. These chips would be paid for on a 90-day basis. The Chinese firm would act as Bruning’s Asia sales representative during this part of the agreement. Then within 90 days the Chinese firm would purchase manufacturing equipment that would allow it to make the chips in China. ‘This will save us both labour and shipping costs’, the Chinese executive pointed out. ‘And all profits will be divided on a 50/50 basis. Your only expenses will be your share of the manufacturing equipment and we will apply your profits against those expenses. So you will have no out-of-pocket expenses.’ The idea sounds very profitable to Edgar, but he is not sure he wants to give someone else the right to produce his product. ‘Technological secrecy is important in this business. It’s the key to success’, he noted to a colleague. On the other hand, Edgar realises that without having someone to sell his product in Asia, he is giving up a large potential market. Over the next 10 days Edgar intends to make a decision about what to do. QUESTIONS

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What type of arrangement is Edgar using in his business dealings with the firms in Australia, Singapore and Dubai? Be complete in your answer. Is the Chinese business proposal a joint venture? Why or why not? Would you recommend that Edgar accept it? Why or why not? Referring to legal challenges in Chapter 13 that Edgar might face, what concerns should Edgar have? If Edgar were looking for an alternative approach to doing business with the Chinese, what would you suggest? Defend your answer.

CASE 12.4 Born global: The Wiggles While often perceived as just a music group, the successful Australian band known as ‘The Wiggles’ is an international success story. Its core business provides family entertainment through concerts, CDs, DVDs, television, toys, play centres, theme parks and online communities. The Wiggles are active in New Zealand, the UK, the Republic of Ireland, the US, Canada and Taiwan, and are considering additional markets in Asia and South America. The Wiggles began their international activity by touring with the support of business partners; and today they also export merchandise, conduct foreign direct investment in the US and operate franchises in Taiwan. For this born-global company, foreign expansion – notably into the US – was part of a conscious strategy to sustain the business. Indeed, 75 to 80 per cent of the Wiggles’ revenue now comes from overseas markets. The Wiggles were formed in 1991 by two members of the Sydney rock band the Cockroaches. Initially, the Wiggles played at children’s birthday parties and shopping centres. Yet they soon discovered that both children and adults were highly receptive to their performance in its own right. Ignoring discouraging criticism from many in the childhood entertainment industry, the Wiggles pursued a novel business model, in which children’s entertainment was made accessible to adults. To inform their undertaking, individual Wiggles obtained tertiary qualifications in early childhood development. By 2000, the Wiggles were touring English-speaking countries, where their commodity could be sold with little modification. And in 2001, they gained exposure to about 65 million Americans by participating in Macy’s Thanksgiving Day Parade in New York City. Owing to the recent terrorist attacks, many people were reluctant to fly, so the Wiggles were embraced by American viewers as a foreign act that had taken the risk to travel and entertain them on US soil. The year 2001 was also significant because it marked the arrival of Mike Conway as General Manager for Business Affairs. Mike Conway initiated strategic board meetings and prompted the founding Wiggles to think of ways of

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leveraging their creative content. This resulted in the Wiggles producing CDs and DVDs, developing TV episodes and merchandise, and exploring different channels such as retail environments, the community and websites. Other business activities include the local production and post-production of music (with CD and DVD production licensed to Village Roadshow), the in-house fulfilment of merchandise whose production is outsourced (mainly to China), online message boards for parents, and sponsorship agreements with Qantas and Australian apple growers. In some ways it was a rocky road though. Lead singer Greg Page cashed out of the business due to health problems. But his replacement, understudy Sam Moran, led the band to higher achievements. In the late 2000s, their business ventures included ‘Wiggles World’ sections in theme parks all over the world, Internet offerings and new TV shows. The Australian Business Review Weekly (BRW) named the Wiggles as Australia’s richest entertainers for four years in a row (2004–2008). The global financial crisis did affect the Wiggles, but they earned $28 million in 2011, placing them on the rich list that year. Nonetheless by 2012 their gruelling success led to retirements and replacements, and the ‘New Wiggles’ era was born in 2013. The Wiggles are a striking example of an Australian enterprise whose international expansion has gone far beyond exporting. According to Risk & Quality Assurance Manager Pablo Munoz, the secrets of the Wiggles’ success can be summarised as ‘persistence, ethics and innovation’. Adapted from Liesch, P., Steen, M., Middleton, S. & Weerawardena, J. (2007). Born to be global: A closer look at the international venturing of Australian born global firms. Australian Business Foundation; AC/DC tops BRW entertainment rich list, ahead of Kylie Minogue and the Wiggles. Herald Sun. 4 November 2009; Haynes, Rhys (2011). Australia’s top 50 entertainers include The Wiggles, Global Creatures, Naomi Watts and Nicole Kidman. The Daily Telegraph, 14 December; The Wiggles website, http://www.thewiggles.com.au

QUESTIONS

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Think of other entertainment acts, perhaps from your own country. In what way would they have the potential to repeat the Wiggles’ success? In what ways do you think it was important for the band to have a professional manager instead of relying on their own qualifications? What are some other categories of ‘unlikely businesses to go global’?

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. franchising global sourcing indirect exporting

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joint venture licensing opportunity entrepreneurship

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1

2

3 4

Search (franchising) And (entrepreneurship). Read the interesting article by Combs, James G., David J. Ketchen, Jr and Jeremy C. Short, ‘Is franchising entrepreneurship? Yes, no, and maybe so’, Entrepreneurship: Theory and Practice, May 2011, pp. 583þ. Do you agree that ‘franchisees are less like entrepreneurs and more similar to non-entrepreneur managers’? Search (Islamic banking) in Magazines. Browse through the articles from The Economist, especially ‘Big interest, no interest: Islamic finance’, The Economist, 13 September 2014, p. 79(US). The article discusses the quotation in the Koran: ‘Those who consume interest cannot stand except as one stands who is being beaten by Satan into insanity.’ How do Islamic banks get around this prohibition? Locate Manners-Bell, John, ‘Improving global supply chain sustainability’, Risk Management, December 2014, pp. 12þ. Does the author believe that ethics and supply chain are mutually exclusive? Search (indirect exporting). You will find one longish section on indirect exporting in one of the encyclopedias. What are the advantages of indirect exporting to a manufacturer?

ENDNOTES 1 PM Tony Abbott, ‘Address to the Asia Society, Canberra’, 25 March 2014, https://www.pm.gov.au/. Published by Commonwealth of Australia, ª 2014. 2 Naisbitt, J. & Aburdene, P. (1990). Megatrends 2000: Ten new directions for the 1990s. New York: William Morrow & Co. 3 Kharas, H. & Gertz, G. (2010). The new global middle class: A cross-over from West to East. China’s emerging middle class: beyond economic transformation, Brookings Institution Press, Washington, DC, http://www.brookings.edu//media/ Research/Files/Papers/2010/3/china per cent20middle per cent20class per cent20kharas/03_china_middle_class_ kharas.pdf. 4 Global Entrepreneurship Monitor data from 2003–2014, http://www. gemconsortium.org; Knoema Data Visualization, http://knoema.com/ GEM2014/global-entrepreneurshipmonitor-2014. Note: Yearly data collection is uneven. Only Japan and USA data are from all 11 years. New Zealand participated only 2003–2005. Philippines only 2006 and 2013. Indonesia only 2006. Hong Kong only 2003–2004, 2007, 2009. The only countries that did not participate in 2013 were New Zealand, Hong Kong and Australia. 5 McKinsey Global Institute, The archipelago economy: Unleashing Indonesia’s potential. McKinsey Global Institute, 2012, http://www.mckinsey. com/insights/asia-pacific/the_ archipelago_economy. 6 Tambunan, Tulus. Entrepreneurship development: SMEs in Indonesia. Journal of Developmental Entrepreneurship, 12(1) (2007), 95–118; Tambunan, Tulus. SME development, economic growth, and

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government intervention in a developing country: The Indonesian story. Journal of International Entrepreneurship, 6(4) (2008), 147–67;Vial, Virginie. Microentrepreneurship in a hostile environment: Evidence from Indonesia. Bulletin of Indonesian Economic Studies, 47(2) (2011), 233–62; Rigg, J. (2003). Indonesia’s small entrepreneurs: trading on the margins. Journal of Asian Business, 19 (2), 108–9. 7 Walker, A. Entrepreneurs face global challenges. 25 May 2011, http:// www.bbc.com/news/business-13547505; Indonesia and USA: Most entrepreneurfriendly nations: Global Poll; OECD. (2011). Entrepreneurship at a Glance, 2011, http://www.oecd.org/document/0/ 0,3746,en_2649_37461_48107008_ 1_1_1_37461,00.html 8 World Bank (2015). Doing business 2015: Going beyond efficiency. Economy profile 2015. Indonesia, http:// www.doingbusiness.org/data/ exploreeconomies//media/giawb/ doing%20business/documents/profiles/ country/IDN.pdf?ver¼2. 9 Nawangpalupi. C. B., Pawitan, G., Gunawan, A., Widyarini, M. & Iskandarsjah, T. (2014). Global Entrepreneurship Monitor 2013 Indonesia Report. Bandung: Universitas Katolik Parahyangan, http://gemconsortium.org/ docs/3352/gem-indonesia-2013-report. 10 Kerry, John (Secretary of State), ‘Remarks at The Fourth Global Entrepreneurship Summit’, Kuala Lumpur, Malaysia, 11 October 2013. 11 Koning, Juliette & Michiel Verver. Historicizing the ‘ethnic’ in ethnic entrepreneurship: The case of the ethnic Chinese in Bangkok. Entrepreneurship & Regional Development, 25(5/6) (2013),

325–48. International Entrepreneurship, ‘Thailand’, http://www.international entrepreneurship.com/asia/thailand. 12 World Bank (2015). Doing business 2015: Going beyond efficiency. Economy profile 2015. Singapore, http:// www.doingbusiness.org/data/ exploreeconomies//media/giawb/ doing%20business/documents/profiles/ country/SGP.pdf?ver¼2 13 World Bank (2015). Doing business 2015: Going beyond efficiency. Economy profile 2015. Vietnam, http:// www.doingbusiness.org/data/ exploreeconomies//media/giawb/ doing%20business/documents/profiles/ country/VNM.pdf?ver¼2. 14 Acs, Zoltan & Siri Terjesen. Born local: toward a theory of new venture’s choice of internationalization. Small Business Economics 41(3) (2013), 521–535; Callaway, S. K. (2008). Global corporate ventures: A new trend of international corporate entrepreneurship. Multinational Business Review (St Louis University), 16(3), 1–22; Cannone, Giusy, Alessia Pisoni & Alberto Onetti. Born global companies founded by young entrepreneurs. A multiple case study. International Journal of Entrepreneurship and Innovation Management, 18(2/3) (2014), 210–32; Chandra, Yanto, Chris Styles & Ian F. Wilkinson. An opportunity-based view of rapid internationalization. Journal of International Marketing, 20(1) (2012), 74–102; Danik, Lidia & Izabela Kowalik. The studies on born global companies – a review of research methods. Journal of Economics & Management, 13 (2013), 9–26; Dimitratos, P., Plakoyiannaki, E., Pitsoulaki, A. & Tu¨selmann, H. J. (2010). The global smaller firm in international

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entrepreneurship. International Business Review, 19(6), 589–606; Efrat, Kalanit & Aviv Shoham. Born global firms: The differences between their short- and longterm performance drivers. Journal of World Business, 47(4) (2012), 675–85; Efrat, Kalanit & Aviv Shoham. The interaction between environment and strategic orientation in born globals’ choice of entry mode. International Marketing Review, 30(6)(2013), 536–58; Gabrielsson, Mika, Peter Gabrielsson & Pavlos Dimitratos. International entrepreneurial culture and growth of international new ventures. Management International Review (MIR), 54(4) (2014), 445–71; Hagen, Birgit & Antonella Zucchella. Born global or born to run? The long-term growth of born global firms. Management International Review (MIR), 54(4) (2014), 497–525; Huan, Z. & Ghauri, P. N. (2010). Internationalizing by learning: The case of Chinese high-tech new ventures. International Marketing Review, 27(2), 223–44; Isenberg, D. J. (2008). The global entrepreneur. Harvard Business Review, 86(12), 107–11; Kaur, Sulina & Manjit Singh Sandhu. Internationalisation of born global firms: Evidence from Malaysia. Journal of the Asia Pacific Economy, 19(1) (2014), 101–36; Kocak, A. & Abimbola, T. (2009). The effects of entrepreneurial marketing on born global performance. International Marketing Review, 26(4/5), 439–52 adapted from Liesch, P., Steen, M., Middleton, S. & Weerawardena, J. (2007). Born to be global: A closer look at the international venturing of Australian born global firms. Australian Business Foundation, http://www.abfoundation. com.au/research_knowledge/research/34; Larimo, Jorma. Small and medium-size enterprise export performance. International Studies of Management & Organization, 43(2) (2013), 79–100; Lopez, L. E., Kundu, S. K. & Ciravegna, L. (2008). Born global or born regional. Evidence from an exploratory study in the Costa Rican software industry. Journal of International Business Studies, 40(7), 1228–38; Norba¨ck, Pehr-Johan & Lars Persson. Born to be global and the globalisation process. World Economy, 37(5) (2014), 672–89; Peiris, Indujeeva, Miche`le Akoorie & Paresha Sinha. International entrepreneurship: A critical analysis of studies in the past two decades and future directions for research. Journal of International Entrepreneurship, 10(4) (2012), 279–324; Pettersen, Inger & Anita Tobiassen. Are born globals really born globals? The case of academic spin-offs with long development periods. Journal of

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International Entrepreneurship, 10(2) (2012), 117–41; Ripolle´s, M., Blesa, A. & Monferrer, D. (2011). Role of international precocity in born global firms. International Journal of Technology Transfer & Commercialisation, 10(3/4), 247–67; Sigala, Luis Eduardo & Alberto Mirabal. Empresas nacidas globales. (Spanish). Born global companies. (English), 18(2 (2013), 54–6; Zhang, M., Tansuhaj, P. & McCullough, J. (2009). International entrepreneurial capability: The measurement and a comparison between born global firms and traditional exporters in China. Journal of International Entrepreneurship, 7(4), 292–322; Zhang, S. (2009). The reasons for emergence of born global firms – taking China as an example. International Journal of Business and Management, 4(8), 37. 15 Cannone, Giusy, Alessia Pisoni & Alberto Onetti. Born global companies founded by young entrepreneurs. A multiple case study. International Journal of Entrepreneurship and Innovation Management, 18(2/3) (2014), 210–32. 16 Vadim Kotelnikov, ‘Building Strategic Alliances’, http://www.1000ventures.com/ business_guide/partnerships_main.html. 17 Vadim Kotelnikov. Joint ventures (JVs), sharing capital, technology, human resources, risks and rewards, http:// www.1000ventures.com/business_guide/ jv_main.html. 18 Banerjee, S. & Mukherjee, A. (2010). Joint venture instability in developing countries under entry. International Review of Economics & Finance, 19(4), 603–14; David A. Kirby & Stefan Kaiser. Joint ventures as an internationalisation strategy for SMEs. Small Business Economics, 21(3) (2003), 229–42; Isenberg, Daniel. To JV or not to JV? That is the question (for Xtech in China). Harvard Business School Cases. 2007; Deepak K. Datta, Martina Musteen & Pol Herrmann. Board characteristics, managerial incentives, and the choice between foreign acquisitions and international joint ventures. Journal of Management, 35(4) (2009), 928–53; Derrick E. D’Souza & Patricia P. McDougall. Third world joint venturing: A strategic option for the smaller firm. Entrepreneurship Theory and Practice, 13(4) (1989), 20; Hong Ren, Barbara Gray & Kwangho Kim. Performance of international joint ventures: What factors really make a difference and how? Journal of Management, 35(3) (2009), 805–32; Jane W. Lu & Dean Xu. Growth and survival of international joint ventures: An external-internal legitimacy

perspective. Journal of Management, 32(3) (2006), 426–48; Julian, C. C. (2008). Joint venture conflict: The case of Thai international joint ventures. Journal of Asia-Pacific Business, 9(1), 6–27; Lewis, J. D. (2000). Trusted partners: How companies build mutual trust and win together. London: Simon & Schuster; Munro-Smith, N. (2008). Danone and Wahaha in China, the interaction of strategy, cultural differences and organization design in international joint venture conflict. Proceedings of the Northeast Business & Economics Association, 139–42; Raff, H., Ryan, M. & Sta¨hler, F. (2009) The choice of market entry mode: Greenfield investment, M&A and joint venture. International Review of Economics & Finance, 18(1), 3–10; Wilkinson, T. J., Thomas, A. R. & Hawes, J. M. (2009). Managing relationships with Chinese joint venture partners. Journal of Global Marketing, 22(2), 109–20; Yuan, Z., Runtian, J. & Wenhao, F. (2008). Do ownership and culture matter to joint venture success? Journal of Comparative International Management, 11(1), 3–13. 19 Bu¨chel, Bettina, & Executing Strategy. Managing partner relations in joint ventures. Image (2013); Bryer, Lanning G., Angela Lam & Lorena Mersan. Protecting trademarks and copyrights internationally – Part I. Licensing Journal, 34(5) (2014), 1–9; Torres, Nicole L. Licensee, license do. Entrepreneur, 33(7) (2005), 88–90. 20 Westhead, P., Wright, M. & Ucbasaran, D. (2001). The internationalisation of new and small firms: A resource-based view. Journal of Business Venturing, 16(4), 333–58. 21 Fernandez, D. with Stahnke, S., Sheehan, R. & Chow, M. (2003). Strategic licensing in the new economy. Menlo Park, CA: Fernandez & Associates LLP, http:// www.iploft.com/Strategic(Tx).pdf. 22 Vadim Kotelnikov. Mergers & acquisition, http://www.1000ventures. com/business_guide/m_and_a_ main.html. 23 For more information, see Stone Forest (2004). Financing mergers and acquisitions: Growth strategies of successful Singapore companies. International Enterprise Singapore, Financing Internationalisation: Growth Strategies for Successful Companies. Singapore: Singapore Information Services, 129. 24 US Department of Commerce and Unz & Co., Inc, Financing export transactions: A basic guide to exporting, http:// www.unzco.com/basicguide/toc.html.

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SEMTIVE Silvia Torres Carbonell, IAE Business School Sebastian Cadenas, RESULTS.com/Road2Argentina.com With the continuing worldwide increase in toxic emissions, rising fossil fuel costs and record energy demand, the need for accessible forms of alternative energy has never been more important. The founders of Semtive in Argentina (www.semtive.com), with a vision of a greener future, decided to create an energy-generating system that would produce renewable energy without further damaging the environment. The idea was simple, but challenging to conceptualise: combine energy efficiency and low environmental impact into an aesthetically pleasing and low-noise design with a price tag that would appeal to the average environmentallyconscious consumer. Semtive is a renewable energy technology company that creates wind and solar-powered energy generating stations for use mainly in urban environments. They are a young global company, with a focus on sustainability, innovation and cost-effective solutions for renewable energy. As an environmentally-conscious organisation, Semtive believes in the Three P’s – people, planet and profits – and that improving the quality of life for the community is just as important as financial gain. They strive to achieve this in their business model, as well as in the final product. The story of Semtive began in Argentina in 2009, when Nicolas Canevaro and Ignacio Juarez decided to work together to provide the world with a better solution to produce clean energy, making it accessible to the masses. Their first step was to analyse the different energy sources available (such as solar or hydro power) in order to evaluate their opportunities and improve on the systems already in

Entrepreneurial case analysis

place. After assessing the possibilities, it became apparent that there was a large opportunity for growth in the market for small wind turbines, specifically in an urban habitat.

Challenges of creating a quality product After researching the possibility of importing turbines from Asia and selling them within Argentina, the question of quality and reliability came into play. Semtive quickly realised that imported goods would not meet their standards to provide the quality of product they wanted to offer. This, coupled with national import restrictions, led to the decision to produce the turbines in Argentina and to use locally sourced parts and materials. The challenges of creating a quality product that Semtive could be proud of, meant it had to be simple, durable, reliable and efficient. The best way to accomplish this was to minimise the number of parts, therefore reducing the possibility of failures, manufacturing costs and the need for repairs. By limiting the use of plastics and other composite materials, the lifespan of the turbine would be increased and the environmental impact reduced. After the four-year development process, including many wind tunnel and field tests, Semtive created a product that not only was efficient, but aesthetically pleasing and costeffective as well. When creating a product on the cutting-edge of technology, research and development is one factor that requires healthy financial resources. Many companies get stymied at the point of finding R&D funding. But Semtive

Chapter 12: Global opportunities for entrepreneurs 449

came up with an innovative solution to this funding crisis. To achieve its R&D goals, Semtive used local universities and graduate students to not only provide cost-effective research capabilities, but also help generate fresh ideas.

Competitive advantage In addition to being a simple and efficient product, Semtive’s turbines are made of aircraft-grade aluminium and are 95 per cent recyclable, creating a lightweight product while still being durable and pleasant to the eye. A person can easily install it in a few hours, using just one tool. The turbine is built for lower wind speeds, which are ideal for use in cities, as the higher wind speeds required for traditional turbines (around 40 km/hour) do not frequently occur there. The turbine is also designed to function well in rural settings where wind speeds tend to be higher. Semtive’s creation is a vertical axis wind turbine (VAWT) that allows the capture of wind from all directions, no matter which direction the wind is blowing, as it is equipped with an orientation device. The alternative, known as a horizontal axis wind turbine (HAWT), needs to be facing directly into the wind in order to function. Another main difference is that VAWT also function in turbulent winds, whereas HAWTs need a smooth paths flowing in layers (laminar). VAWTs also generate very low noise levels (unlike the HAWT), making it ideal for home and city use, without creating unnecessary noise pollution. (Go to the following website to view images of Semtive’s wind turbine and locations of use: https://www.flickr.com/ photos/semtive/.) To date, Semtive has developed three basic models of turbines, each with varying sizes for different uses. The classic version is the Wind Turbine Nemoi, which has all of the characteristics described above and is generally used in fixed locations. The Move Autonomous System is similar to the Nemoi but is portable and is used as a replacement for conventional diesel generators in the home or anywhere that power is needed. The third model is the Street Light Pole Lumina, which incorporates a solar panel into the turbine design, making use of solar and wind energy, and also has a built-in lighting device (street lamp). Ideal uses for the three models are power generation, energy conservation, use in telecommunication towers, to reduce electricity expenses and as a backup system against possible electrical supply disruptions. Lumina can be used for hybrid lighting, autonomous public lighting, and marine applications, in houses without connection to main power sources, wireless alarms or fully autonomous Wi-Fi connections.

Entrepreneurial case analysis

Importance of investors As a registered company in Argentina, it was important for Semtive to be able to raise funds for its research and development from multiple sources. The economic climate in Argentina is challenging, with uneven economic performance and high growth alternating with severe recessions, coupled with high inflation and currency exchange limitations. Worse yet, Argentina’s regulatory environment is constantly changing with new rules and restrictions. Therefore, both local and international investors are very reluctant to provide funding for Argentine companies. Despite this, Semtive was able to receive local support in the form of angel investors. In 2011 a group formed by Nicola´s Canevaro’s former colleagues at Standard & Poor’s Financial Services (S&P) raised US$156 500, which was principally used to further develop and fine-tune the product. Additionally, funds were devoted to improve Semtive’s marketing image, including a simplification of the website to match the company’s simplistic philosophy. This pivotal shift helped open a new target market of public and institutional customers. The second round of angel investment came in 2013 from the IAE Business School’s Angel Club in Buenos Aires, the first angel network created in Argentina in 2005. As well, they received additional financing from some of the initial investors at S&P, to the tune of almost US$300 000. These funds were used primarily for further development, product expansion and enhancement of the current turbine, as well as team growth. Finally, the turbine was ready for the market, where it had a successful launch, beating out the competition in terms of price and style. On the global front, Semtive has been seeking foreign expansion and investment in order to provide the muchneeded stable currency that is lacking locally. They have created an international structure designed to receive financing from investors regardless of their origin, which allows the company to expand at a different pace than a company solely based in Argentina. Semtive is relying on their solid product and business model to help them grow and evolve in an international marketplace. Semtive decided to develop a joint venture in India – a region where there is a high demand for economical forms of alternative energy. India is a market of 1.3 billion people, where nearly 400 million are without access to electricity, making it an ideal location for expansion. When penetrating this new market, a local perspective proved to be essential in providing knowledge of regulations and barriers, as well as having an eye on the competition.

450 Part 3: Developing entrepreneurial ventures

Beyond this, Semtive is the first Latin American business to partner with the Singularity University (SU) labs portfolio companies to leverage exponential technologies to address humanity’s grand challenge of energy. Singularity University is part university, part think-tank and part business-incubator located in Silicon Valley. As a first step, Semtive will work with SU companies to promote its expansion. With a group of local investors who have their finger on the pulse of the local market, they hope to achieve traction and reach the potential growth they envision. Semtive is now a global company, operating in different regions and developing a wide range of solutions. They are changing the way people generate energy. With their global reach and commitment to the environment, Semtive is determined to develop a wide range of solutions to bring reliable, simple and affordable sources of energy in order to improve living conditions worldwide.

Discussion questions 1

2 3

Is it even possible to develop an innovative solution for challenge of affordable sources of energy from the base of a developing economy, with huge political and economic obstacles? How? What are the enablers of this process? Provide examples from your own country. In your opinion, what is the value proposition of Semtive and its differential attributes? Review how to give a pitch in Chapter 16, particularly the ‘The one-page idea’ on page 614. What kind of

Entrepreneurial case analysis

4

5

6

7

pitch do you imagine Ignacio and Nico gave in order to convince the first angel investors in Argentina to invest more than U$S400 000 in this start up? What strategy would you recommend to Ignacio and Nico to expand globally? Review the global strategies in Chapter 12. For example, should they set up subsidiaries, make agreements with manufacturers and distributors, license or franchise their technology, or expand the company in other locations? Why? How will they face competition, especially at a global level, with a patented product that can be copied by making only small changes? Would you recommend an investor to Semtive now that they had already gone through the early stages of their company? Why? Experiential Exercise. Using Mindmapping software, develop five new ideas as to how you could build upon and expand the initial business idea into new businesses. Start with the existing business as your central idea and then develop a range of aspects associated with the theme. List 20 assumptions associated with the original idea. Take up to 10 of these assumptions and challenge them as a means of provoking new possibilities. Mindmapping software can be found at: Ingenium (http://www.creativityproject.net/ingentool.php); MindManager (http:// www.mindjet.com/mindmanager/); Wikipedia (http:// en.wikipedia.org/wiki/List_of_concept-_and_mindmapping_software).

»

PART « FOUR

GROWTH STRATEGIES FOR ENTREPRENEURIAL VENTURES

CHAPTER 13

CHAPTER 14

CHAPTER 15

CHAPTER 16

Legal and regulatory challenges for entrepreneurial ventures

Sources of capital for entrepreneurial ventures

Measuring performance for entrepreneurial ventures

Developing a sustainable business plan

Entrepreneurship

» CHAPTER THIRTEEN LEGAL AND REGULATORY CHALLENGES FOR ENTREPRENEURIAL VENTURES CHAPTER OBJECTIVES

1 Two of the necessary conditions for stimulating entrepreneurship are that governments have the right motivation and that they establish and implement the right regulations . . . The right motivation means that the government sees its role as looking after the wellbeing of all the citizens of the country, especially the poor. . . . In many poor countries it is almost impossible for an entrepreneur to set up a business in a legal way. It takes too long, is too complicated and costs far more than they can afford. Dalai Lama1

To introduce the importance of legal and regulatory issues to entrepreneurs

2 To consider the regulatory environments of the Asia–Pacific within which a new venture must exist 3 To examine intellectual property protection, including copyright, patents, trademarks and domain names 4 To recognise the important international protection regimes for intellectual property 5 To critically examine the IP practices of Asia–Pacific countries 6 To compare the common legal forms of business organisation in the Asia–Pacific, such as sole proprietorship, partnership and corporation 7 To be aware of the signals that foreshadow insolvency and bankruptcy 8 To examine the trend for environmental regulations that will affect business entrepreneurship

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Entrepreneurship

Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 453

LEGAL AND REGULATORY CHALLENGES This chapter has a broad remit in considering the four types of legal and regulatory challenges that entrepreneurs will face in the Asia–Pacific region. We begin with a look at the various regulatory regimes that make up ease of doing business, from starting a company to closing it down. We then examine one of the most critical aspects for entrepreneurs: how to protect your intellectual property. Equally important is to then consider under what legal form to incorporate the firm. Finally, we look at regulations concerning climate change and global warming, regulations that are becoming increasingly troublesome for entrepreneurs. In typical legalistic style, we do need to note that the Asia–Pacific region includes many different countries and the scope of this text is limited to general knowledge that cannot be construed as advice. For specific information on legal matters particular to a country and your venture always seek the advice of appropriately qualified professional persons knowledgeable about the jurisdiction of your operations.

UNDERSTANDING ASIA–PACIFIC REGULATORY ENVIRONMENTS We first consider the diversity of regulatory environments in our region and how they may influence your own ventures. Why do some entrepreneurs succeed while others fail in international competition? Perhaps it is better to turn the question around and ask: Why is it that a particular economy becomes the home base for competitive globally oriented entrepreneurs? What makes Australia a global leader in wine exports? What made Malaysia a world leader in palm oil production? How did New Zealand make it to global ranks in the creative industries? What propelled South Korea into the forefront in electronics? Why is it location, location, location? One powerful factor is the regulatory environment. Each year the World Bank analyses specific points of interest of great value to entrepreneurs, such as the time, cost and outcomes of bankruptcy proceedings against a limited liability company, the predictability and reliability of property laws and labour regulations, among others. These figures can change each year, so don’t be surprised if one or another country dramatically improves or declines. The World Bank’s continual attention does have an effect as countries jostle for comparative advantage in the location game. The regulatory environment in the Asia–Pacific is one of extremes, with some countries being among the best in the world while others leave much to be desired; however, the good news is that generally doing business in our region is getting better, sometimes much better. Working in global markets means that you will have to comply not only with your own rules and regulations, but also with those of other countries. Unfortunately, business success can be affected as much by a government directive as by a management decision. Your fundamental entrepreneurial decisions – such as which lines of business to go into, which products and services to produce, which investments to finance, how and where to make goods and how to market, what prices to charge and environmental protection – are increasingly subject to governmental regulations beyond your control.2 The most important regulatory areas that influence entrepreneurs are bankruptcy laws, business formation, contract enforcement, credit regulations, international trading regulations, investor protection, labour regulations, licensing and permits and property laws. Beyond this it is sometimes bewildering what else you have to take into account, including dispute settlement and arbitration,

Which are the global multi-lateral organisations that really matter to entrepreneurs? A primer. Learn all about it on CourseMate Express.

454 Part 4: Growth strategies for entrepreneurial ventures

customs and tariffs, standards setting, research and development (R&D) and innovation policy, anti-trust legislation, personnel and human resources, finance and taxation, securities and banking, trade and securities commissions, food and drug regulations, consumer products and protection regimes, transportation and communications, defence and security, occupational health and safety, environmental protection, energy regulation, export–import transactions and foreign relations and defence – the list boggles the mind. The good news is that expertise is available in all these areas, but it does not minimise your own responsibility from being knowledgeable about how your business affects, and is affected by, relevant and related laws. Overall, some countries in our region are leaders in the global ‘ease of doing business’ sweepstakes. According to the World Bank, Singapore, New Zealand and Hong Kong top the list followed by the Republic of Korea, the US and Australia all occurring in the top ten.3 Thailand, Malaysia, Taiwan and Japan follow them, falling in the top 30 of the 189 countries included in the study. At the other end of the scale Pakistan, Papua New Guinea and India fall in the bottom 30 per cent of countries while the Philippines has shown big improvements and has moved from 136 to 95 in the last two years (see Table 13.1). TABLE 13.1 ECONOMY

EASE OF DOING BUSINESS, 2015 EASE OF DOING BUSINESS RANK

ECONOMY

EASE OF DOING BUSINESS RANK

Singapore

1

Tonga

69

New Zealand

2

Vietnam

78

Hong Kong

3

Fiji

81

United States

7

Solomon Islands

87

Korea, Rep.

5

China

90

Australia

10

Philippines

95

Malaysia

18

Sri Lanka

99

Taiwan

19

Indonesia

114

Thailand

26

Pakistan

128

Japan

29

Papua New Guinea

133

Samoa

67

India

142

Source: World Bank. 2014. Doing Business 2015: Going Beyond Efficiency. Washington, DC: World Bank. Published by International Bank for Reconstruction and Development/The World Bank, ª 2014

Of course, being at the top of this list of ‘best countries to do business in’ does not mean there is no regulation. No one would argue that it is a free-for-all in New Zealand, that workers are not at risk of abuse in Australia, or that there is no need for fair bankruptcy processes in Japan. Indeed, to make the top rankings in terms of ease of doing business, countries need to put strong regulations in place, such as property rights protection and labour provisions. The problem is that some countries in our region make it excessively difficult for entrepreneurs to operate. Sadly, the countries with the biggest obstacles for entrepreneurs are the ones that most need them for creating jobs and wealth.

Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 455

Even within countries there can be great variation with respect to ease of doing business. The World Bank’s 2014 assessment drilled down to cities and found that the first and second cities in the 11 nations with populations greater than 100 million showed considerable variations. The contrast between two cities is most stark when the complexity and costs are taken into consideration whereas the strength of the regulatory environments between the two cities revealed little difference. What does this mean for you? While different cities may have the same regulatory hurdles and cost structures for such things as starting a business, securing construction permits or getting your electricity connected, it may take longer, causing you delays in opening your doors and adding a time cost. This is something to keep in mind when you have the opportunity to choose the city for your new business.4

ENTREPRENEURS FACE REGULATORY NIGHTMARES Chickens in China ENTREPRENEURIAL Since he went into business with 1000 chickens and 50 pigs in the 1980s, outspoken Chinese rural entrepreneur Sun Dawu has been battling red tape and official interference that are EDGE legacies of decades of communist economics. Mr Sun’s toughest trial came in 2003 when he was detained for six months on charges of illegally accepting financial deposits in a case that highlighted the funding problems of rural enterprises. He says his company repeatedly tried to raise loans for expansion from local state credit cooperatives, only to be rejected because it ‘lacked scale, lacked approval and lacked (a place in lending) quotas’. Eventually, the group began to raise funds openly by accepting deposits from employees and local residents. Banks and cooperatives – many technically insolvent – rarely channel funds to productive enterprises and much of the vital capital flows to richer urban areas, he argues. Sun sees a systemic problem in an insistence by authorities on official control that is intended to shield local savers from the risk of putting their cash in private hands – even when they know best who is most transparent and trustworthy. Zhang Jun, an economics professor at Fudan University, has been studying China’s business reform and economic transition since 1994. He says that China’s private entrepreneurs rely on befriending what he describes as ‘government entrepreneurs’ to finance their businesses. While such a relationship might imply corruption, as government officials use their political powers for personal gains, it also provides the lowest-cost financing for private business owners. Because China lacks a normal business funding channel, businesses often rely on relationships with politicians, a situation they refer to as their ‘second-best financing option’. Sources: Mure Dickie, ‘There’s hope for China, says freed entrepreneur: Sun Dawu tells Mure Dickie about his battles with officialdom and struggle to find finance for his farm business’, Financial Times, London, 14 November 2003. Published by Financial Times, ª 2003. People Forum, ‘Sun Dawu the man’, available at: http://www.peopleforum.cn/viewthread.php?tid¼30751.

POLITICAL INSTABILITY AND CORRUPTION Political instability and corruption can be practical barriers for entrepreneurs. Frequent government changes can lead to business policy reversals that undercut an entrepreneur’s marketplace certainty and hinder the efficient functioning of business plans. It may still be possible to do business in a country with transitory governments or inconsistent policies (see Table 4.1 ‘Asia–Pacific Corruption Perceptions Index 2013’ in Chapter 4).

INTERNATIONAL PROTECTIONS FOR INTELLECTUAL PROPERTY Now we move from Asia–Pacific regulation to the legal frameworks within which entrepreneurs operate. This section is a bit of good news/bad news. First, we need to know how new products,

456 Part 4: Growth strategies for entrepreneurial ventures

services and innovations can be protected and exploited for commercial gain. That’s called intellectual property rights (IPR). The continuing growth of IPR theft and trade in fakes and pirated materials threatens innovative and creative economies worldwide. Consider these facts. 1 The World Health Organization estimates that up to 30 per cent of medicines sold in developing countries are counterfeit. Nearly one-half of drug counterfeiting was reported in the Asia–Pacific.5 2 A quarter of a million malaria deaths each year might be prevented if the patients were treated with real drugs instead of fake ones.6 3 An astonishing 23.8 per cent of all Internet bandwidth in North America, Europe and the Asia–Pacific was devoted to copyright infringement.7 4 Unauthorised copying of entire textbooks (including this one) is common, often undertaken on a ‘copy-on-demand’ basis from digital files, making it difficult for users to distinguish between legitimate and pirate products.8 Here are the greatest violations in intellectual property in the world today (see Table 13.2). TABLE 13.2

IP BLACK MARKET RANKINGS (US$ BILLIONS p.a.)

Counterfeit drugs

$200

Counterfeit electronics

$169

Software piracy

$ 63

Counterfeit foods

$ 49

Counterfeit auto parts

$ 45

Counterfeit toys

$ 34

Music piracy

$ 12.50

Counterfeit clothing and shoes

$ 24

Cable piracy

$

9.00

Video game piracy

$

8.10

Source: Havocscope Global Black Market Information, http://www.havocscope.com/products/ranking. Copyright ª by Havocscope, LLC. Used by permission.

While most owners of intellectual property are working fervently to lock in their old entitlements and are pushing for increasingly restrictive laws and enforcement,9 vast parts of the world are seceding from these intellectual property rights regimes and setting up offshore havens for infringers of intellectual property to carry out their predatory activities. In some ways, intellectual property crime mirrors illicit drug trafficking in its scope, pervasiveness and nimbleness in resisting eradication (not that some big companies aren’t also engaged in some of these tricks). Their lawyers have many ways to house intellectual property abroad so as to shelter income from overseas sales. For example, a multinational may transfer a patent to a newly formed Bermuda subsidiary so that royalties from sales of products made outside the US flow to the subsidiary, where they accumulate tax-free. Rogue states in the Asia–Pacific are particularly active and the International Intellectual Property Alliance (IIPA) 2011 Special 301 Report on Copyright Protection and Enforcement10 documents clear examples.

Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 457

NOTORIOUS ASIAN MARKETS Global piracy and counterfeiting continue to thrive, due in part to large marketplaces that deal in counterfeit goods. Here are some of the biggest violators. •

•

• • • •

•

ENTREPRENEURSHIP

Aiseesoft.com: Reportedly based in China, this website is repeatedly identified as a provider IN PRACTICE of DVD and video conversion tools and suites that are designed to bypass protection measures and allow unauthorised viewing of video content. Kuaibo.com (QVOD Technology): Public statements by its founder claim that QVOD Technology now has software on over 25 million computers that facilitates unauthorised access to copyright-protected materials and has become a leading facilitator of wide-scale distribution of copyrightinfringing content and other content considered illicit in China. QVOD (and Baidu.com, which offers similar services) have been the targets of recent enforcement actions by Chinese industry and the Government of China. Zing.vn: Based in Vietnam, this primarily social media website provides an infringing deep-linking music portal, attracting large numbers of users. Harco Glodok (Jakarta, Indonesia): Although there are legitimate distributors, this market for consumer electronics and parts is reported to be one of the largest markets for counterfeit and pirated goods in Indonesia. Thailand’s red zones include Panthip Plaza, Klong Thom, Saphan Lek and Baan Mor (Bangkok) shopping centres – are all targeted enforcement areas for selling pirated and counterfeit goods. Silk Street Market (Beijing, China): Beijing’s Silk Street Market is perhaps the single biggest symbol of China’s IP enforcement problems and is an example of endemic counterfeiting of consumer and industrial products in many retail and wholesale Chinese markets. Garment Wholesale Center (Guangzhou Railway Station, Guangzhou): This centre houses a number of markets selling largely counterfeit clothing and footwear focused on wholesale buyers for export to foreign markets. There are also numerous mobile street vendors openly selling counterfeit watches and handbags. Source: Office of the United States Trade Representative, ‘Out-of-cycle review of notorious markets’, 12 February 2014, http://www.ustr.gov/sites/default/files/FINAL-PUBLISHED%202013_Notorious_Markets_List-02122014.pdf. ª 2014.

Ideas and knowledge are an important part of global trade. Some would say that in the modern era, intellectual property is the engine that drives the economy. A lot of the value of entrepreneurial products lies in the invention, innovation, research, design and commercialisation of new products – most often abroad. So it is vital that entrepreneurs have the incentive to create – and intellectual property rights are central to it because a rising proportion of economic output is conceptual rather than physical. Intellectual property protection is actually a two-way street. Entrepreneurs can legally obtain and exploit intellectual property from abroad. Or they can protect it abroad, stop others from using it and use these rights to negotiate payment in return for using it. The countries of the Asia–Pacific are actually net importers of intellectual property. That means that many of the creators and inventors of intellectual property consumed in the Asia–Pacific are actually located overseas. It also means that Asia–Pacific entrepreneurs will just as frequently take advantage of licensing intellectual property from abroad as they will protecting it. Of course, most entrepreneurs are not lawyers, so they need to be knowledgeable about intellectual property protection. The term intellectual property (IP) is used to describe the intellectual assets that may attract rights. These intellectual assets can be given some form of legal protection in order to prevent unauthorised use by others. The rights afforded the assets fall under the umbrella of intellectual property rights and they include patents, trade secrets and copyright, as well as trademarks or service marks.

458 Part 4: Growth strategies for entrepreneurial ventures

Intellectual property protection has advanced considerably in the past 10 years. A great deal of the action is now taking place internationally (see Table 13.3). The field of IP protection is huge, but globally operating entrepreneurs need to know at least about the following five institutions. • The World Trade Organization (WTO) is a place where member governments sort out the trade problems and negotiate compliance with WTO agreements signed by the bulk of the world’s trading nations. • The WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) is especially important. It is an international agreement covering copyright, patents, trademarks, trade secrets, industrial designs and integrated circuit layouts. TRIPs is the most important international agreement on copyright, patents and other intellectual property rules in force today. • The Berne Convention for the Protection of Literary and Artistic Works is one of the world’s oldest treaties and most respected by countries around the world. Together with the Paris Convention, which provides under certain conditions equal treatment for foreigners and recognition of earlier filing date for IPRs in Convention Countries, these treaties seek to guarantee that copyrights are respected across national borders. • The World Intellectual Property Organization (WIPO) is an international organisation that administers 23 international treaties dealing with different aspects of intellectual property protection. The organisation counts 182 nations as member states. • The Patent Cooperation Treaty (PCT) streamlines patent applications across several countries at once by providing a single international application procedure before having to ultimately file individual applications into each country of interest. TABLE 13.3

ASIA–PACIFIC COUNTRIES’ PARTICIPATION IN MAJOR IP REGIMES WTO

TRIPs

BERNE

WIPO

PCT

RESPONSIBLE AUTHORITY

Australia

ü

ü

ü

ü

ü

IP Australia: http://www.ipaustralia.gov.au

Bangladesh

ü

ü

ü

ü

ü

The Department of Patents, Designs and Trademarks (DPDT): http://www.dpdt.gov.bd

Brunei Darussalam

ü

ü

ü

ü

China

ü

ü

ü

ü

Fiji

ü

ü

ü

ü

Hong Kong

ü

ü

India

ü

ü

ü

ü

ü

Intellectual Property India: http://www.ipindia.nic.in/

Indonesia

ü

ü

ü

ü

ü

Directorate General of Intellectual Property Rights: http:// www.dgip.go.id

Japan

ü

ü

ü

ü

ü

Japan Patent Office (JPO): http://www.jpo.go.jp

Korea Republic

ü

ü

ü

ü

Korean Intellectual Property Office (KIPO): http:// www.kipo.go.kr

Brunei Intellectual Property Office: http://www.bruipo.com.bn ü

State Intellectual Property Office of the People’s Republic of China: http://www.sipo.gov.cn State Administration for Industry and Commerce Trademark Office: http://sbj.saic.gov.cn Fiji Government Online Portal: http://www.fiji.gov.fj Intellectual Property Department of Hong Kong: http:// www.ipd.gov.hk/eng/home.htm

Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 459

TABLE 13.3

ASIA–PACIFIC COUNTRIES’ PARTICIPATION IN MAJOR IP REGIMES (Continued ) WTO

TRIPs

BERNE

WIPO

PCT

RESPONSIBLE AUTHORITY

Malaysia

ü

ü

ü

ü

ü

Perbadanan Harta Intelek Malaysia http://www.myipo.gov.my/

New Zealand

ü

ü

ü

ü

ü

Intellectual Property Office of New Zealand: http://www.iponz.govt.nz

Pakistan

ü

ü

ü

ü

Papua New Guinea

ü

ü

Philippines

ü

ü

Singapore

ü

Sri Lanka

Intellectual Property Organisation Pakistan: http://ipo.gov.pk

ü

ü

Intellectual Property Office of PNG: http://www.ipa.gov.pg

ü

ü

ü

IP Philippines: http://ipophil.gov.ph

ü

ü

ü

ü

Intellectual Property Office of Singapore (IPOS): http://www.ipos.gov.sg

ü

ü

ü

ü

ü

National Intellectual Property Office of Sri Lanka: http://www.nipo.lk

Taiwan

ü

ü

Thailand

ü

ü

ü

ü

ü

Department of Intellectual Property of Thailand: http://www.ipthailand.org

Vietnam

ü

ü

ü

ü

ü

National Office of Industrial Property (NOIP): http://www.noipvietnam.com

The Taiwan Intellectual Property Office: https://www.tipo.gov.tw/mp.asp?mp¼2

In 1995, the WTO became the chief administrator of the international trade arena. Currently, 97 per cent of the world’s population (especially after China and nine other nations joined between 1999 and 2001) falls under the umbrella of the WTO. The WTO regime rests on what are called the ‘Four Pillars’ of WTO membership: • Most favoured nation: All WTO members receive the benefit of, and are bound to extend, ‘most favoured nation’ (MFN) status in order to prohibit discriminatory trade practice. • National treatment: Every WTO country is entitled to ‘national treatment’ of its goods, services and intellectual property. The importing country must treat imported products like a domestic product. • Tariff reductions: Members agree to limit, reduce or eliminate tariffs over a given period of time. • Non-tariff reductions: Members also agree to eliminate or reduce non-tariff barriers such as quotas, excessive paperwork and undisclosed trade rules.

PATENTS One might say that a patent is a contract between society as a whole and an individual inventor. The objective of a patent is to provide the holder with a temporary monopoly on their invention and therefore to encourage the creation and disclosure of new ideas and innovations in the marketplace. A patent provides the owner with exclusive rights to hold, transfer and license the production and sale of the product or process. However it is not a permissive right, in that owning a granted patent does not guarantee that your patented invention doesn’t infringe an earlier patent owned by another party.

460 Part 4: Growth strategies for entrepreneurial ventures

FIGURE 13.1 A GENERAL PATENT PROCESS

TIME (Years)

TIME (Years)

0

1

Novelty/Freedom to Operate Searches

2

Draft and File Provisional Patent Application

0

Determine overseas markets AND/OR

3

1

AU

NZ

US

CN

JP

4 File International Application (PCT)

EU

1

Filing

7

Examination & Registration International search and examination opinion

5 2

6 AU

NZ

US

CN

JP

EU

2.5

Grant Filing

7

Examination & Registration 3.5

5

Renewals/Annuities

8

Grant

8

Renewals/Annuities

6.5

9 Max 21

Expiry

Max 21

This figure illustrates a general patent process only. Many other variations are possible and the appropriate strategy should always be developed for the specific circumstances of the matter and reviewed on a regular basis to ensure that it remains relevant. Refer notes as indicated by ‘1-9’ in the accompanying ‘Entrepreneurship in Practice’ feature. Source: Madderns Patent & Trade Mark Attorneys – Australia. ª Madderns Patent & Trade Mark Attorneys. Used by permission.

Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 461

A GENERAL PATENT PROCESS: NOTES



1 Conduct patent searches to determine the likelihood of obtaining patent protection for the ENTREPRENEURSHIP invention and likely scope of protection. Remember that one of the requirements of obtaining valid patent protection is that the invention is new and inventive over the ‘prior art’. Consider also conducting ‘Freedom to Operate’ searches to determine potential risks of IN PRACTICE infringing another party’s patent rights. Keep in mind that searching is not a guarantee. There are millions of documents to search and relevant documents may not be located for many reasons. Furthermore, since patent applications are generally not published for 18 months from filing, searches will generally not locate any patent applications filed in the past 18 months. 2 Draft and file a patent application. A common form of first patent filing is a provisional patent application. The filing of the first patent application creates the ‘priority date’ for the patent application. The priority date is very important as it forms the basis for future deadlines and is the date against which ‘prior art’ is assessed. 3 At 12 months from the priority date, if protection is still to be sought, it is possible to file one or more corresponding complete patent applications in one or more countries. The countries indicated are examples only. This must generally be done within 12 months of the earliest priority date. Corresponding patent applications are filed directly into each country of interest. The patent application then undergoes examination under the patent laws of that country by the relevant Patent Office (see note 7). Substantial costs may be incurred in the filing process depending upon the number of countries filed in and in which countries. 4 Alternatively, or in addition, an international patent application may be filed under the Patent Cooperation Treaty (PCT). This is not an ‘international patent’, but rather a system under which a single patent application can be filed which reserves the Applicant’s rights for up to 18* months to file in one or more countries that are members^ of the PCT. This effectively extends the 12 month period to 30* months before having to file individual patent applications into each country of interest, as per note 3, and having to incur potentially significant costs. 5 During the extended 18 months, an International Search and a Preliminary Opinion is provided which provides a nonbinding indication as to the likelihood of obtaining patent protection for the invention claimed in the PCT application. This can be a useful tool in deciding whether to proceed to seek patent protection in the countries of interest. 6 National phase – at the 30* month deadline, individual complete patent applications must be filed into each country of interest. Failure to do so by this deadline can result in the abandonment of patent rights in the relevant countries. This step is equivalent to that indicated at note 3 above, and from this point onwards, the patent application proceeds as if it were filed directly into the country of interest (example countries only indicated) and undergoes examination under the laws of the relevant country by the relevant Patent Office. Substantial costs may be incurred in the filing process depending upon the number of countries filed in and in which countries. 7 Each country’s Patent Office will examine the patent application under the patent laws of that country, including conducting patentability searches and issuing objections (in an ‘Examination Report’ or ‘Office Action’) to the patent application. In most countries, the applicant will have at least one opportunity to respond to the objections raised, by submitting arguments and/or amending the claims where possible. The examination process, including allowability of amendments and timelines, will differ from country to country. This stage can also incur significant costs. If all objections are overcome by the relevant deadlines, the patent application will be granted in that country. The patent then becomes enforceable against infringers. 8 To keep a patent or patent application alive, maintenance fees, referred to as renewal fees or annuities, must be paid to the relevant Patent Offices. In some countries these fees are payable annually for the life of the patent, and in some countries they are payable every few years. The amount payable is dependent upon the country. Failure to pay the fee by the due date can lead to irrevocable lapsing of the patent and loss of rights in the invention. In some countries, maintenance fees (renewals/annuities) are payable even before the patent is granted. 9 A patent only has a limited lifespan, after which the patent expires. Provided that all relevant maintenance fees are paid, and in the absence of the patent being revoked for other reasons, a patent can reach its full term before expiring. The full term of most patents is 20 years from the filing date of the complete patent application. In cases where a provisional patent application is filed first, the maximum term of the complete patent application ends after 20 years plus the number of months between the filing of the Provisional application and the complete application. In the case where the complete application is filed at the maximum deadline of 12 months from the Provisional filing,

       

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this period is 21 years after the Provisional filing date. Some patents relating to pharmaceuticals may be able to be extended by up to another 5 years. Some countries also have other types of patent systems such as ‘utility model patents’ or ‘innovation patents’, which have shorter maximum terms, such as 8 years or 10 years. After its maximum term, a patent cannot be renewed and the invention becomes freely available for use to society. *Some countries allow 31 months, 32 months or in some cases longer under certain circumstances. ^At the time of writing, there are 148 member countries, which include most of the main commerce countries. A notable exception is Taiwan. If Taiwan is a country of interest, a patent application must be filed directly in Taiwan by the 12 month deadline as it is not available via the PCT route. Source: Madderns Patent & Trade Mark Attorneys – Australia. ª Madderns Patent & Trade Mark Attorneys. Used by permission.

The WTO’s TRIPs agreement provides, although with some exceptions, that the international standard for duration of patent exclusivity is 20 years from the date of filing. In some jurisdictions there are alternative patent systems (called ‘second-tier’) which have shorter patent terms. Under all patent systems, once the term of the patent period has expired, people are free to use the invention as they wish. However, pharmaceutical patents provide an exception to this rule in most countries, where the patent term may be extended by up to five years, to a total of 25 years to compensate for the time to obtain regulatory approval before the patent owner is able to exploit the invention. Although all WTO members are subject to patent provisions in the TRIPs agreement, patents are actually granted under national laws and so the rights are also national in scope. For example, an Australian patent can be enforced only against infringements in Australia. While the PCT system provides for a single international filing procedure, the system ultimately still requires the applicant to select their countries of interest, file in those countries and undergo the examination procedures in those countries – independently of each other. One of the several benefits of the PCT system is that it essentially provides a buffer of up to 30 months (from the earliest priority date) during the ‘international phase’ before having to file in individual countries (the ‘national phase’). Figure 13.1, with the associated Entrepreneurship in Practice box, outlines the indicative timing of these phases. Patents are provided for products or processes that are ‘new, involve an inventive step and are capable of industrial application’. A patent is the result of a unique invention and patent holders are provided protection against infringement by others. In general, machines, products, plants, compositions of elements (chemical compounds) and improvements on already existing items can qualify for patent protection.11 In some countries the ‘second-tier’ patent system allows protection for inventions with a lower threshold of inventiveness than that required for the ‘usual’ patent. Countries that provide this second-tier patent system include Australia (the Australian Innovation Patents with a maximum term of eight years), China and Japan (the Chinese and Japanese Utility Model Patents with a maximum term of 10 years) and others in some European countries. A patent specification (the written document forming the patent) comprises two main parts – the technical description and the claims. Each part performs its own function. The technical description is there to teach the reader how to make or perform the invention covered by the patent and usually includes drawings and tables. The claims are paragraphs that define the boundary of the legal monopoly ‘claimed’ by the patent. Here are some examples of text from notable patents: • Thomas Edison defined the light bulb as ‘an electric lamp for giving light by incandescence consisting of a filament of carbon of high resistance … enclosed in a receiver made entirely of glass and conductors passing through the glass and from which receiver the air has been

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exhausted … with a carbon filament or strip coiled and connected to electric conductors so that only a portion of the surface of such conductors shall be exposed for radiating light’. • The Wright Brothers defined the airplane as ‘a flying-machine, a normally flat aeroplane having lateral marginal portions capable of movement to different positions above or below the normal plane of the body of the aeroplane, such movement being about an axis traverse to the line of flight, whereby said lateral marginal portions may be moved to different angles relative to the normal plane of the body of the aeroplane so as to present to the atmosphere different angles of incidence, and means for so moving said lateral marginal portions, substantially described’. • Nikola Tesla defined the electrical motor as ‘a motor wound with coils forming independent energising circuits on the armature, which is a cylinder or disk mounted to rotate between two opposite magnetic poles. As a result of this, when the generator is set in motion, [electrical] currents of alternately opposite directions are directed … in such a manner as to produce a progressive shifting or rotation of the magnetic poles of the motor armature’. Any inventor must weigh the value of the innovation against the time and money spent to obtain the patent. Also, it is important to remember that patents are not a foolproof system and they can be contested which presents a number of risks. The first risk is that they can be declared invalid.12 This can occur if an opponent to the patent holder is able to show that the patented invention was not new at the time the patent application was filed (or its earliest valid priority date, whichever is earlier), or that it was new, but not sufficiently inventive, or that the patent did not describe the invention in enough detail to allow the invention to be fully understood and replicated. A second risk is that the court decides that the alleged infringing product or process is in fact not an infringement of the claims of the patent. A third risk is that an alleged breach of rights may not be upheld by the court. This can occur if the patent holder is ruled to have waited an unreasonable length of time before asserting his or her rights. A fourth risk may be that those bringing suit against the patent holder may seek to prove that an individual misused the patent rights – for example, by requiring certain purchases of other goods or services as part of the patent-use arrangement – which may bring other agreements such as licences into dispute. One author recommends that the entrepreneur should spend the money on turning investors’ heads rather than on high-priced lawyers. Too much protection of intellectual property increases litigation and slows innovation, some say. It is better to stay ahead of the competition by rolling out new products faster than people can copy them.13 Another simpler and cheaper form of protection is known as a design registration. This form of protection protects only the visual appearance of an article. Importantly, it does not protect the functionality of the article in the same way as a patent. However, in some cases design registration may be adequate for some purposes, and be an easier and less expensive option. A good example of design registration in automobile counterfeiting is the case of the LandWind X7 SUV, which is an exact replica of the Jaguar Land Rover’s Evoque. Unlike previous fake car fiascos (the Chinese had produced perfect copies of the Toyota RAV4), JLR put in place an IP protection strategy against copycats. It protected the appearance of the Evoque in Europe and China through trademark and design registrations. It also secured protection for specific features of the Evoque, such as the front radiator grill, the light clusters and the bumpers. With other companies, JLR also supported the establishment of the first dedicated IP court in China in 2014 to oversee that their IP is safe on Chinese soil.14

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TOP PATENTS THAT INFLUENCED BUSINESS • 1840: Samuel F. B. Morse for the telegraph • 1855: Isaac Singer for the sewing machine • 1856: Henry Bessemer for steel manufacturing • 1865: John Deere for ploughs IN PRACTICE • 1876: Alexander Graham Bell for the telephone • 1878: Thomas Edison for the phonograph • 1880: Thomas Edison for the light bulb • 1888: Nikola Tesla for the ‘electrical transmission of power’ 1895: Charles Jenkins for the motion picture machine 1906: Orville and Wilbur Wright for the aeroplane 1911: Henry Ford for an automobile transmission mechanism 1913: William Burton for the manufacture of gasoline 1930: Philo Farnsworth for the television 1950: Shockley, Bardeen and Brattain for the transistor 1972: Amos Joel, Jr, cellular mobile communication system 1979: Stephen Wozniak, microcomputer for use with video display

ENTREPRENEURSHIP

• • • • • • • •

Source: US Patent and Trademark Office; Bouchoux, D. (2008) Patent Law for Paralegals. Published by US Patent and Trademark Office, ª 2008.

TABLE 13.4

INTELLECTUAL PROPERTY INFORMATION SOURCES

New Zealand’s Intellectual Property Framework The Ministry of Economic Development has produced information sheets on various forms of intellectual property in New Zealand

http://www.med.govt.nz

IP Australia is the federal government agency responsible for granting rights in patents, trademarks and designs in Australia

http://www.ipaustralia.gov.au

The United States Patent and Trademark Office website provides a wealth of valuable information for entrepreneurs Go Trademarks > Trademark Electronic Search System (TESS) Users can locate patent and trademark information, such as registration forms, international patents, legal issues and FAQs Users can also check the status of a trademark or patent application on this website

http://www.uspto.gov

Patents.com provides the most comprehensive worldwide source of patent data

http://www.patents.com

Center for Global Innovation/Patent Metrics. This website, sponsored by Source Translation and Optimization, offers assistance with Internet, biotech and e-commerce patents Users also can sign up for the free daily information email, ‘Internet patent news service’.

http://www.bustpatents.com

The United States Copyright Office at the Library of Congress website provides information on copyright protecting works, licensing and legal issues. Users also can search copyright records on the website

http://www.loc.gov/copyright

This website allows the user to look up any topic in a search and yield returns of the actual written law, court precedents and current cases and interpretations. Also gives topical searches that aid the user in getting started as well as a business section to help put the laws into more practical applications

http://www.findlaw.com

Espacenet. A European search database covering more than 70 million patents from around the world

http://worldwide.espacenet.com

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SIX RULES OF PATENT STRATEGY Because quite often the patent process is complex, careful planning is required. Experts recommend the following basic rules: • Rule 1: Create an IP-protective environment to minimise the risk of losing your IP before even being able to apply for protection. This includes ensuring that the appropriate employer/ employee or contractor agreements are in place and have the necessary IP and confidentiality clauses to ensure that you own the IP and that it is kept secret. This also includes establishing confidentiality and security policies to ensure that confidential information does not leak out whether deliberately or accidentally. Such policies could include limiting the number and level of persons who have access to confidential information, classifying confidential information in different levels of confidentiality, educating staff about IP and the need for confidentiality (including directions not to speak about confidential issues in public places even among each other, and prohibiting certain levels of information from physically and electronically leaving the office. A failure to establish an IP-safe environment before IP is even created can result in loss of that IP. • Rule 2: Pursue patents that are broad, are commercially significant and offer a strong position. This means that relevant patent law must be researched in order to obtain the widest coverage possible on the idea or concept. In addition, there must be something significantly novel about the innovation. In jurisdictions where a ‘first to invent’ system operates it is helpful to record all steps or processes in a notebook and have them witnessed so that documentation secures a strong proprietary position. Although this will not provide any protection or enforceable rights it is necessary to show dates of the invention’s development to prove ‘first to invent’ where such systems operate. Traditionally, the ‘first to invent’ system was applicable in the US, although under the America Invents Act (AIA) currently in force the US has been a ‘first to file’ country since 16 March 2013, in which ownership goes to the first inventor to file a patent application for the invention rather than the first to invent it. However, there is still value in keeping records of development, particularly in cases of copyright, where ownership must be proved to enforce copyright. • Rule 3: Prepare a patent plan in detail. This plan should outline the costs to develop and market the innovation as well as analyse the competition and technological similarities to your idea (refer also to Figure 13.1 and the associated Entrepreneurship in Practice ‘A general patent process: notes’). Attempt to detail the precise value of the innovation. It should also include the conduct of potential infringement searches prior to committing to a plan to consider whether the invention to be exploited may itself infringe one or more patents already in existence in any of the countries in which the invention is to be exploited. • Rule 4: Have your actions relate to your original patent plan. This does not mean a plan cannot be changed. However, it is wise to remain close to the plan during the early stages of establishing the patent. Later, the path that is prepared may change – for example, licensing out the patent versus keeping it. • Rule 5: Establish an infringement budget. Patent rights are effective only if potential infringers fear legal damages. Thus it is important to prepare a realistic budget for prosecuting violations of the patent. Some insurance brokers provide patent insurance which may cover some costs incurred in defending or enforcing your patent.

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• Rule 6: Evaluate the patent plan strategically. The typical patent process takes three to five years although it can be expedited. This should be compared to the actual life cycle of the proposed innovation or technology. Will the patent be worth defending in three years or will enforcement cost more than the damages collected?15 In practice, an entrepreneur needs to consider carefully the value and benefit of patenting, which can consume a lot of money on protecting intellectual property that may fund marketing and product development. If patenting is a preferred pathway and cash is short to make the most of marketing, many experts suggest that inventors consider licensing their product rather than marketing it themselves.16 It is quite common for a company to patent a technology that they have developed, but license it to another party rather than exploit it themselves. If, after careful review, an entrepreneur concludes that the innovation has a good chance of withstanding a legal challenge and is commercially worthwhile, a patent should be pursued. If a challenge is mounted, legal fees may be sizable, but a successful defence can result in sufficient compensation to cover profits made by the patent infringer or damages plus possibly up to 60–70 per cent of legal fees. It’s also worth considering the IP enforcement insurance, which can be a great help in covering many of the costs incurred in enforcing and/or defending your patent. In fact, US courts may award damages of up to three times the actual amount for ‘wilful infringement’ although many countries do not include extra factors for damage. Australia has a ‘punitive damages’ element whereby if the infringer is found to have been particularly wilful or mischievous, an additional punitive amount may be awarded over and above the usual profits or damages awarded. Considering the cost of the patent process and the amount of time and resources it takes to protect patents, getting patent protection may not even be the best way to go. There are those who argue that the cost of mounting suits against infringers and defending litigation from challengers on a portfolio of patents renders the activity pointless.17

COPYRIGHTS A copyright provides exclusive rights to creative individuals for the protection of their literary or artistic productions. It is not possible to copyright an idea, but the particular way that an idea is expressed can often be copyrighted. This expression can take many forms, including books, periodicals, dramatic or musical compositions, art, motion pictures, lectures, sound recordings and computer programs. Under TRIPs: • copyright extends beyond the death of the author to varying degrees depending upon the law of the country it was created in, but typically it is 50 or 70 years after death. For instance, in Australia and Singapore it extends to 70 years but in New Zealand, Fiji and China it is 50 years. One exception is photographs, which may have shorter terms of 25 years after the death of the creator in some cases. • a copyright is automatically granted to the producer, artist or author and does not require registration although in some countries registration may be required before infringement claims can be made • computer programs are viewed as ‘literary works’ and receive the same level of protection • national exceptions to copyright – such as the fair use doctrine in the US which makes provision for reproduction and use of copyrighted material under certain conditions – must be tightly controlled

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• in each country, intellectual property laws may not offer any benefits to local citizens which are not available to citizens of other TRIPs signatories (this is called ‘national treatment’); TRIPs also has a most favoured nation clause. The owner of this copyright may: • reproduce the work • prepare derivative works based on it (for example, a condensation or movie version of a novel) • distribute copies of the work by sale or otherwise • perform the work publicly • display the work publicly. Each of these rights, or a portion of each, also may be transferred.18

UNDERSTANDING COPYRIGHT PROTECTION For the author of creative material to obtain copyright protection, the material must be in a tangible form so it can be communicated or reproduced. It also must be the author’s own work and therefore the product of the author’s skill or judgement. Concepts, principles, processes, systems or discoveries are not valid for copyright protection until they are put in tangible form – written or recorded. Copyright acts throughout the world diversely seek some variation of protecting such things as textual material, computer programs, compilations, artistic works, dramatic works, musical works, cinematograph works, sound recordings, broadcasts and published editions.19 Note that it is not possible to copyright an idea – the underlying ideas embodied in a work may be used freely by others. What is copyrightable is the particular way an idea is expressed. Whenever an idea and an expression are inseparable, the expression cannot be copyrighted. Generally, anything that is not an original expression will not qualify for copyright protection. Facts widely known to the public are not copyrightable. Page numbers are not copyrightable because they follow a sequence known to everyone. Mathematical calculations are not copyrightable. Compilations of facts, however, are copyrightable. Formal registration of a copyright may only be required with a National Copyright Office of one’s resident country when an author seeks to begin a lawsuit for infringement. In addition, in some jurisdictions an author can find their copyright invalidated if proper notice isn’t provided. To prove that copyright exists is not necessarily easy but being able to verify the following points would help to prove the case: • identity of the author or maker of the copyright material • nationality or residence of that author or maker • location in which it was made • date or calendar year in which it was made.20 If an author can substantiate a copyright infringement, the normal remedy is recovery of actual damages plus any profits the violator receives. Works that one intends to defend against infringement on grounds of copyright entitlement may be signalled by putting the copyright notice (ª) on it. It is not necessary to register copyrights with the Copyright Office except in the instance in some jurisdictions where you want to sue somebody for infringement. Remember, ideas cannot be copyrighted. Therefore, if someone writes an article automatically affording copyright, you are certainly free to read that article, digest it, take the ideas from that article and other sources and weave them into your own material without any copyright infringement problems. On the other hand, if someone has copyrighted an article, you cannot simply rephrase it or change minor words and claim it as your own. Exactly where the line is to be drawn is not entirely clear. However, a little common sense will give the appropriate answer in most cases.21

Business travellers: beware of your mobile devices! On CourseMate Express read about how to protect your trade secrets when you travel.

468 Part 4: Growth strategies for entrepreneurial ventures

On CourseMate Express read ‘Just Did It’ – Nike versus Mike: a parody on trademark infringement.

Anyone who violates an author’s exclusive copyright is liable to be prosecuted for infringement. However, there are exceptions such as the fair use doctrine in the United States or the fair dealing provision in Australia. Fair use provides for the legal, non-licensed citation or incorporation of copyrighted material in another author’s work under certain, specifiable conditions. The US is the only country with the more generous but also less defined fair use doctrine. But outside the US, comparable copyright limitations can be found in many nations’ copyright statutes. Most common law countries (especially those with a history as British territories or colonies) have the related doctrine known as fair dealing with narrowly drawn exceptions. For example, in Australia, the grounds for fair dealing are: • research and study • review and criticism • parody or satire • ‘reporting the news’ • legal advice.22

WATCH WHAT YOU SAY! The government can’t help protect your business from the competition if your employees are willingly sharing valuable information. Copious amounts of sensitive and confidential information are being made public every day by business travellers who pay no heed to the fact that people have ears. Carrying on a seemingly harmless conversation with a co-worker on a IN PRACTICE plane, in a bus or in a restaurant has wreaked havoc for more than one company. An employee of Fuld & Company, a management consulting firm, was riding a shuttle bus when he heard every bit of a company’s distribution strategy being discussed in the seat in front of him. Luckily for the two talkers, he wasn’t competition. He did, however, let it be known what had just occurred. Protecting trade secrets is not a new concept, but with the amount of businesspeople travelling every day and the development of technology, the smallest slip can be dangerous. Leonard Fuld, a competitive intelligence expert, states that it’s common for companies to overlook the human factor when it comes to information leaking out. He emphasises the point by talking about the ‘Nerd Bird’, a frequent shuttle flight from Austin, Texas, to San Jose, California, that carries mostly engineers and executives from the semiconductor and software industries. ‘I was even told an anecdote about an executive who waited until passengers had disembarked and then quickly roamed the aisle to see if any documents had been left behind’. ‘I know of people in firms who justify booking first-class airfares based on the quality of information they might be able to pick up that way’, states a Silicon Valley businessperson. Verbal exchanges aren’t the only way travellers are hurting themselves. Rental car trunks, stolen briefcases and the simple misplaced memo are known to be gold mines as well. Business travellers should keep these things in mind to protect intellectual property that can’t be protected by the government.

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1 2 3 4 5 6

Avoid talking shop in public areas where competitors are likely to be present. Business jargon isn’t a code when the executive sitting right beside you is in the same industry. Never expose laptop screens on planes, buses, or other conveyances when working on confidential facts and figures. If the work is unavoidable, ask for a window seat and use smaller font sizes. Be particularly vigilant at trade shows. Proprietary technology, new product releases and the like should be discussed in detail only behind closed doors. Pay phones and mobile phones pose an amazing opportunity for others to partake in the conversation. Be cautious of your surroundings when making important phone calls. Protect the files on your computer by purchasing a cable lock or security software. Help deter computer theft by labelling both the case and computer and never letting them out of your sight. Keep unnecessary documentation back at the office. Also check your work area, and account for all paperwork after handling important documents to see if anything has ‘mysteriously’ landed on the floor. Source: David Barber, ‘Loose lips sink you’, Inc., http://www.inc.com, June 1999. Copyright ª by Mansueto Ventures.

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GOOGLE WAS NOT AMUSED BY THE TRADEMARK PARODY Normally, pure parody is a good defence, but when Peng! Collective created a parody site of Google called google-nest.org, the global giant was not amused. Peng! was ‘debuting’ some new Google products. Google’s humourless lawyers sent a cease and desist letter threatening legal action and demanded that the domain be surrendered. The site can still be seen on the Wayback Machine at https://web.archive.org/web/20140507213322/http://google-nest.org but if you go to http://www.google-nest.org you will see the curt message ‘suspended’. The Electronic Frontier Foundation came to Peng!’s defence, calling their site ‘pure noncommercial political commentary’ that can’t be punished with trademark law. But deep pockets defeated the pesky EFF. Here were some of the new products: •

•

ENTREPRENEURSHIP IN PRACTICE

Google Bye. Be remembered. Nobody wants to leave this world unnoticed. Everyone deserves a proper send-off. Google Bye is a service to help you make sure you’re remembered the right way. . . . The Google Bye Profile will act as a memorial to you, highlighting (in images, video, audio and text) your unique character, achievements and special moments from your life. Automatically shared with all your contacts and living on in Google search results, it preserves the best version of you for others to cherish. So get busy living. We will handle the rest. Google Bee. Your little friend in the sky. Introducing the first personal drone. Google Bee watches over your house and family when you are away, ensures your kids are going where they say they are going, and collects the best moments of your life to share with your family at the end of the day. Solar powered and suited to all weather conditions, the Bee flies above you (up to 1200 feet) almost unnoticed and collects information determined by you. Sources: Mullin, J. (2014), ‘Google scolded for ‘‘polite trademark bullying’’ of parody site’, Ars Technica, 22 May 2014, http://arstechnica.com/tech-policy/2014/05/google-scolded-for-polite-trademark-bullying-of-parody-site; Huet, E. (2014), ‘Google nest spoof by German activists promises eerie, data-driven future’, Forbes, 7 May 2014, http://www.forbes.com/sites/ellenhuet/ 2014/05/07/google-nest-spoof-by-german-activists-promises-eerie-data-driven-future.

TRADEMARKS Thanks to trademark law, no confusion should result from one venture using the symbol or name of another. Article 15 (1) of TRIPs states that ‘signs, in particular words including names, letters, numerals, figurative elements and combinations of colours as well as any combination of such signs, shall be eligible for registration as trademarks’. A registrable trademark is a distinctive name, mark, symbol or motto identified with a company’s product(s) and may be registered at the National Trademark Office of one’s resident country. Trademarks also exist under common law without the need for registration. In this case a mark (or name, symbol, motto, etc.) used to distinguish the goods or services provided in the course of trade from the goods or services provided by others, with extended use over time, can be defended as a trademark. However, the use of trademark registration only provides some certainty to rights, although it does also send a powerful signal to the market that the trader places value in the mark and will fight to secure it and prevent its unauthorised use. Specific legal terms differentiate the exact types of marks. For example, trademarks identify and distinguish goods. Service marks identify and distinguish services. Certification marks denote the quality, materials or other aspects of goods and services and are used by someone other than the mark’s owner. Collective marks are trademarks or service marks members of groups or organisations use to identify themselves as the source of goods or services.23 A trademark can be a design, like the Nike swoosh. It can be a colour like purple for Cadbury. It can even be a sound, like the MGM lion’s roar. The nature of trademarks can vary in several ways: • Fanciful trademarks: These have no meaning before they became trademarks – examples include Starbucks (coffee) and Vero (insurance). • Arbitrary trademarks: These are common words that have an arbitrary relationship to the product – examples include Apple (computers) and Amazon (e-commerce).

You have to roll your eyes! On CourseMate Express read about Entrepreneur Magazine bullying entrepreneurs not to use ‘its’ trademark word.

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• Suggestive trademarks: Suggestive trademarks indirectly allude to a quality of the product – examples include Playboy (men’s magazine). • Descriptive trademarks: These describe the goods or service they market – examples include Computerland (computer store) and Vision Centre (optics store). • Generic trademarks: Generic trademarks describe a whole class of products – examples include Personal computer (for a personal computer) and Milk (for milk).24 However, descriptive and generic trademarks are less likely to be suitable for registration (see Figure 13.2). FIGURE 13.2 THE SPECTRUM OF TRADEMARK DISTINCTIVENESS

Fanciful/arbitrary

Descriptive

Very protectable

Generic Not protectable

Source: Kenneth De Leon, ‘Trademark law basics’, http://www.registeringatrademark.com/trademark-law-basics.shtml

Once filed, the trademark application and later if successfully issued, the trademark registration, is listed in the register of the trademark office. This listing offers several advantages: • nationwide constructive notice of the owner’s right to use the mark (thus eliminating the need to show that the defendant in an infringement suit had notice of the mark) although, especially in some countries, it is still recommended to mark the goods or services with the ¤ symbol to eliminate any argument of notice • protection against importers using the mark • in some countries, such as the US, the mark is incontestable after five years,25 but not so in Australia. A trademark registration lasts for a period of 10 years. The registration is thereafter renewable for further periods of 10 years, for an indefinite period. In most countries, a condition of renewing the registration, and indeed maintaining its validity, is that the trademark is used in relation to at least the goods or services in respect of which the trademark is registered. To obtain protection for your trademark overseas you will need to file an application with intellectual property offices in overseas countries of interest. There are also a number of international agreements (e.g. the Madrid Protocol and Madrid Agreement) which provide for trademark coverage in multiple countries under a single international registration. If a trademark is properly registered, used and protected, the owner can obtain an injunction against many uses of the mark that are likely to cause confusion. Moreover, if infringement and damages can be proven in court, a monetary award may be given to the trademark holder.

AVOIDING THE TRADEMARK PITFALLS Trademark registration and search can be costly, sometimes ranging into the thousands of dollars. Trademark infringement can be even more expensive. To avoid these pitfalls, here are seven basic rules entrepreneurs should follow when selecting trademarks for their new ventures. 1 Never select a corporate name or a mark without first doing a trademark search. 2 If your lawyer says you have a potential problem with a mark, trust that judgement. 3 Seek a coined or a fanciful name or mark before you settle for a descriptive or a highly suggestive one. 4 Whenever marketing or other considerations dictate the use of a name or a mark that is highly suggestive of the product, select a distinctive logotype for the descriptive or suggestive words.

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5 Avoid abbreviations and acronyms wherever possible and when no alternative is acceptable, select a distinctive logotype in which the abbreviation or acronym appears.26 6 Ensure that use is made of the trademark. In many countries, a trademark can become susceptible to invalidation after three or five years if the trademark is not being used. 7 Monitor use to ensure it is not used descriptively to avoid invalidation by genericism (i.e. that the mark has become descriptive – e.g. Kleenex). Be wary of differences between countries where first-to-file issues in countries like China exist. In these countries a distributor could file your trademark for registration and own it in that country. It’s good practice to file for trademark registration in each country before starting your business. Test your understanding and build your entrepreneurial knowledge on trademarks in the ‘What kind of trademark?’ exercise at the end of this chapter and make sure that you can distinguish between trademark and copyright entitlements with the ‘Protecting your legal interests’ exercise.

WHO OWNS THE COPYRIGHT TO A MONKEY’S SELFIE? Is this a specious argument? Monkeys can ENTREPRENEURSHIP own the copyright to selfies they click of themselves just like humans do. This is the controversy between IN PRACTICE Wikimedia (the foundation behind Wikipedia) and British photographer David Slater. According to the Wiki, the selfie shot by a cheeky black macaque (see Figure 13.3) in FIGURE 13.3 Indonesia who was fooling around with MONKEY SELFIE Slater’s equipment should not be bound by copyright law. The photo was uploaded to Wikimedia, a public domain image database. Slater claimed that free use of the image is jeopardising his income. But Wiki turned down Slater’s request to remove the photo and refused to change the ‘open’ copyright classification. Wiki says the picture is in the public domain, because as the work of a Source: Wikimedia.org non-human animal, it has no human author in whom copyright is vested. The US Copyright Office ruled in the Monkey Selfie case that any works created by a non-human are not subject to copyright. The august authority also cited murals by elephants would not be copyrightable. ‘To qualify as a work of ‘‘authorship’’ a work must be created by a human being. . . . Works that do not satisfy this requirement are not copyrightable. The Office will not register works produced by nature, animals, or plants.’ A Boston Globe editorial argued the contrary: ‘It wouldn’t have happened without [Slater]. To claim that the photo cannot be licensed because the monkey has the best claim on the image is specious reasoning.’ Such Monkey business! Sources: ‘Photographer ‘‘lost £10,000’’ in Wikipedia monkey ‘‘selfie’’ row’, BBC News, 7 August 2013, http://www.bbc.com/news/ uk-england-gloucestershire-28674167; Sparkes, Matthew, ‘Wikipedia refuses to delete photo as ‘‘monkey owns it’’’, The Daily Telegraph, 6 August 2014, http://www.telegraph.co.uk/technology/news/11015672/Wikipedia-refuses-to-delete-photo-as-monkey-ownsit.html; United States Copyright Office (2014), ‘Compendium of U.S. Copyright Office Practices, § 313.2’, 19 August 2014. p. 54, http://copyright.gov/comp3/chap300/ch300-copyrightable-authorship-122214.pdf; Editorial, ‘Photographer should have rights to monkey ‘‘selfie’’ ’, Boston Globe, 9 August 2014, http://www.bostonglobe.com/opinion/editorials/2014/08/08/photographer-should-have-rightsmonkey-selfie/twpCD7fNWkrHhqdeJtRjiL/story.html.

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DOMAIN NAMES Domain names are the human-friendly forms of Internet addresses and are commonly used to find websites. While designed to serve the function of enabling users to locate computers (and people) in an easy manner, domain names have acquired a further significance as business identifiers and, as such, have come into conflict with the system of business identifiers (protected by intellectual property rights) that existed before the arrival of the Internet. Domain names may be awarded to trademark holders over others through arbitration or litigation. This means that having trademark registration in the same name as your domain name may ensure that you retain ownership of the name. However, an entrepreneur must keep in mind that filing for a trademark is a distinct and separate process to applying for a domain name. When deciding upon a trademark or a domain name an entrepreneur should check that both are available and free of potential conflict. Ideally trademark and domain name registrations should take place simultaneously to avoid later difficulties. A major problem arises when cyber squatters (people who purchase a large number of domain names in general) offer domain names for sale back to the person or company who should rightfully have the domain under trademark laws. Needless to say, trademark holders object to third parties registering domain names which they believe should be theirs. The domain name registries, many of whom are not governmental organisations, have had to find a solution to this and therefore have dispute resolution systems which operate in parallel with national laws. The majority of the generic top level domain names (.com, .net, etc.) now use the Uniform Dispute Resolution Policy (UDRP), but some critics claim that the UDRP process favours large corporations. There have been instances of companies, individuals or governments trying to get domain names away from their current owners by making false claims of trademark violation. Sometimes they are successful. This practice is called reverse-cyber squatting.

SOME INTERESTING WIPO UDRP DECISIONS Entrepreneur magazine has long been accused of ‘trademark bullying’ and claims it owns the US trademark for the word ‘entrepreneur’. Since the early 1980s, EMI has sued or threatened to sue scores of businesses and organisations it claims infringed its trademarks, including domain names. IN PRACTICE • Gucci has brought cases to win control of more than 100 domains, including: http://authentic gucci-handbags.org; http://bigguccioutlet.com; http://buycheapgucci.org; http://buyguccionline.org; http://cheapguccibackpack.org; http://cheapgucci-bags.org; http://yourguccioutlet. com. An Arizona cyber squatter was forced by the F. Porsche AG company of Germany to desist using the URL www.pornsche.com because it resolved into a porn search engine and the domain name was confusingly similar to the complainant’s trade name and trademark PORSCHE, since the addition of the letter ‘n’ is not sufficient to prevent confusing similarity and serves the purpose of a pornographic business. The 140 year-old BERLITZ language training company got http://www.berlitzsucks.com removed from the Internet for extortion, inflammatory remarks and defamation. ‘Hard Yakka’ are common words in colloquial Australia, simply meaning ‘hard work’. The Australian clothing firm Yakka Pty Ltd, which has a line of clothes called HARD YAKKA got back http://www.hardyakka.com from a retail outlet in Victoria because it confused the customer. Chanel succeeded in an action in Korea to have the registration ‘chanel.co.kr’ cancelled. The domain name had been attached to a site selling condoms, pheromone perfumes and lingerie. This was held to be contrary to Korea’s unfair competition legislation.

ENTREPRENEURSHIP

•

• •

•

•

cont.

»

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cont.

•

Pfizer, the gigantic pharmaceutical, was successful in stopping the use of < .net> despite the plaintiff arguing is a very common word consisting of the characters for brightness and luck. The plaintiff argued that the that literal translation of a foreign company’s name was copied from Chinese in a paradoxical way and then registered as its own and exclusive trademark in China. Sources: Barrett, P.M. (2011), ‘Entrepreneur, the magazine that sues entrepreneurs’, BloombergBusiness, 20 May 2011, http://www.bloomberg.com/news/2011-05-19/-cite-entrepreneur-cite-the-magazine-that-sues-entrepreneurs.html; A fun primer on WIPO, ICANN, and the Uniform Domain Name Dispute Resolution Policy, http://media.law.uark.edu/arklawnotes/2014/05/28/a-funprimer-on-wipo-icann-and-the-uniform-domain-name-dispute-resolution-policy/#_ftnref15: Thousands of interesting cases can be found in the ‘Index of WIPO UDRP Panel Decisions’, http://www.wipo.int/amc/en/domains/search/legalindex.jsp.

TRADE SECRETS Trade secrets are business processes and information that are unpatentable, patentable but not enforceable, or patentable but for some reason there is no desire to disclose through patenting to make information public. This might include customer lists, plans, research and development, pricing information, marketing techniques and production techniques. For example, no company would reveal a complete map of its supply chain. Generally, anything that makes an individual company unique and has value to a competitor could be a trade secret.27 Trade secret protection is only possible with employer and employee diligence. Staff who are privy to trade secrets must be clearly advised of their obligations, especially on leaving the organisation, and should be bound to these obligations through their employment contract. Protection of trade secrets extends both to ideas and to their expression. For this reason and because a trade secret involves no registration or filing requirements, trade secret protection is ideal for software. Of course, the secret formula, method or other information must be disclosed to key employees. Businesses generally attempt to protect their trade secrets by having all employees who use the process or information agree in their contracts never to divulge it. Theft of confidential business data by industrial espionage, such as stealing a competitor’s documents, is a theft of trade secrets without any contractual violation and is actionable in itself. In many instances, trade secrets are based on discoveries or inventions that could be patented, but the owner has chosen to keep the discovery or invention secret. Trade secrets, such as the formula for Coca-Cola, have been in effect for many years and will continue for as long as the secret is kept from the public. If it had been patented, the formula would have long been in the public domain. The law clearly outlines the area of trade secrets. Information is a trade secret if: (1) it is not known by the competition, (2) the business would lose its advantage if the competition were to obtain it and (3) the owner has taken reasonable steps to protect the secret from disclosure.28 Keep in mind that prosecution is still difficult in many of these cases.

OPPORTUNITIES FROM CHANGING INTELLECTUAL PROPERTY ATTITUDES Advances in technology have opened up whole new areas of and issues with patentable products; for example, biotechnologies and computer software, to mention only two of the most noteworthy areas at the cutting edge of leading technologies. In Australia isolated elements of DNA are deemed patentable but in the US they are deemed not – and then there is the question of so-called Internet patents.29 Technology development is making it increasingly difficult to enforce many of the more

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conventional forms of intellectual property. A good example of this is MP3 file-sharing on the Internet, which raised questions regarding the viability of copyright in musical recordings. This has led to a movement to toughen protection to halt piracy and the decline in revenues and profits for established firms on the one hand while on the other it has raised the prospect of new business models such as Apple’s iTunes. Perhaps now is the time for a radical rethink of traditional intellectual property concepts30 and how it applies to business model innovation.31 Instead of considering reforms to strengthen patents and copyrights, perhaps we should be moving in the opposite direction. Some examples can be found in India where efforts are focused on creating generic AIDS drugs that are much less expensive than patented drugs made by the transnational drug companies. Entire nations (for example, China) are leaving Microsoft in the dust as they install open-source operating systems on their computers. Even Tesla, the leader in electric car technologies, has opened its patent portfolio for others to use believing it to be the fastest way to stimulate the electric car market.32

IDENTIFYING LEGAL STRUCTURES FOR ENTREPRENEURIAL VENTURES To incorporate or not to incorporate? What is your opinion? Should the Harlow’s incorporate? Read about it on CourseMate Express.

Having examined Asia–Pacific regulations as well as the legal environment that entrepreneurs face, we now turn to the third aspect of this chapter: legal structures that might be chosen to incorporate the company. Every country has a regulatory body – composed of legislation and a regulatory authority – that dictates how businesses are started, operated and wound up. Famous ones include: Australian Securities & Investments Commission (ASIC), New Zealand Companies Office, Singapore Accounting and Corporate Regulatory Authority (ACRA) and US Securities & Exchange Commission (SEC). These government bodies oversee the incorporation of companies and the regulation of businesses. We now look at the types of legal structures that businesses use to run their affairs. In the Asia–Pacific, there is a variety of common legal business structures. They include unincorporated forms such as the sole tradership and partnerships; incorporated companies; and other forms of business such as trading trusts, cooperatives and non-profit organisations. Because each form has specific advantages and disadvantages it is impossible to recommend one form over the other. The entrepreneur’s specific situation, concerns and desires will dictate this choice. Choosing the appropriate legal structure is a complex issue because of the inherent tax consequences and liabilities of the owner(s) and because the structure selected will determine what capital-formation options are available. Here are some of the important factors that must be taken into consideration when selecting a business structure. • Asset protection: The business structure will determine the extent to which personal assets (such as the family home) are at risk against business failure. • Limited liability: This refers to the important commercial characteristic where the business participants’ personal liability for the business debts is limited to a specified amount. • Distribution flexibility: Some business structures enable payment of different types of income such as trading profits, capital gains and franked dividends to different participants. • Financing: As the business grows, it may be necessary to raise more funds by way of borrowing or equity. Consider the ease with which future financing can be raised while selecting the business structure.

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• Taxation: This is a complex issue that goes well beyond merely selecting the structure that is taxed at the lowest rate. • Business environment: This includes stringency of the regulatory approval systems and technological risks. • Personal and community relationships: Increasingly, couples are sharing ownership, management and responsibility. Sometimes called copreneurs, they share trust, commitment, loyalty and work–life balance – or not! The increase in social enterprise activity is also responsible for creating structures that enable protection of assets that benefit community, such as the legal entity of the Community Interest Company emerging in the United Kingdom.

INCORPORATED COMPANIES New ventures initially can be categorised as incorporated or unincorporated businesses. In fact, legally the term ‘company’ should only be applied to an incorporated business and not an unincorporated business. What is the difference between a company and a corporation? The public perception is confusing. Most people think that a company is a locally owned and operated business (such as a convenience store), while a corporation is a very large business (such as Woolworths). In legal terms, this is totally misleading. In the US a corporation is a legal entity (distinct from a natural person) that often has similar rights in law to those of a natural person. In Australia, New Zealand and Singapore, as well as in the UK and Ireland, this is known as an incorporated company. They both have limited liability and their shareholders are not normally responsible for the company’s debts beyond the amount they paid for their shares. Accordingly, while the terminology differs, the concept of a company or corporation is largely the same. In Australia, the use of ‘Inc.’ signifies an incorporated association; that is, a non-profit entity, also with limited liability for its members. Whereas in the US, ‘Inc.’ is used to indicate that an entity is a corporation, namely an incorporated company where personal assets of the shareholders are protected. In the US, corporations are often identified by the term ‘Incorporated’ added after the business name, such as ‘Texas Instruments, Incorporated’. Incorporation is the birth of a company; it means giving legal form to a company. The Certificate of Incorporation is basically a birth certificate. Just like infants themselves, incorporated businesses become separate legal entities in their own right and are recognised therefore as separate from their owners. Around the world there is a variety of terms used for the different types of incorporated small businesses and Table 13.5 details some of these.

LIMITED LIABILITY COMPANIES For almost all business purposes around the world, two forms – the private company and the public company – are the most frequent legal structures. In Australia, these different types of companies are denoted by the abbreviations Pty Ltd (proprietary limited) and Ltd (limited), respectively. The essential difference is that the private company cannot legally offer its shares to the public.

Private company In English law and in other countries with similar laws, the assets available to the creditors in the event of bankruptcy are limited to the assets of the company. Consequently, if the company goes into liquidation, creditors cannot seize the private assets of the directors, such as home, car and savings.

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TABLE 13.5

BUSINESS STRUCTURES AROUND THE WORLD

ABBREVIATION

WHAT IS IT?

WHERE USED

Inc.

An incorporated association; that is, a non-profit entity

Australia

A corporation or incorporated company

United States

LLC

Limited liability company Similar to a corporation combined with a limited liability partnership

Worldwide (not used in Australia)

ILP

Incorporated limited partnership Similar to LLC but with more flexible investment vehicles – minimum level of investment $20 million

Australia (Vic., Qld, NSW)

LLP

Limited liability partnership Each partner is fully liable for the debts of the partnership, not including acts of professional negligence or malpractice

Worldwide

Ltd

Private company with liability limited by shares (not traded publicly)

Commonwealth countries (other than Australia), including India and New Zealand

Ltd

A public company Liability limited by shares or guarantee* Shares may be traded publicly but will not always be *guarantee applies to not-for-profit companies only

Australia

NL

Mining company not entitled to call on the unpaid issue price of shares No liability for shareholders, as distinct from limited liability

Australia

PLC

Public limited company Liability limited by shares which are traded publicly

Commonwealth countries (other than Australia)

Pty Ltd

Proprietary limited A private company with liability limited by shares (not traded publicly)

Australia

PT

A state owned or majority state owned company

Indonesia

PT Tbk

A company listed on the public stock exchange

Indonesia

Bhd

Equivalent to a public limited company

Malaysia

Sdn.Bhd

A private company limited by shares, not traded publicly

Malaysia

HUF

Hindu Undivided Family – a business owned by a joint family belonging to the Hindu religion

India

PVT.LTD

A private limited company

India

PSU

A public sector unit – listed on the stock exchange with major ownership being state or central government

India

LTC

Look-through company – a limited liability company which allows the transfer of income and expenditure directly to shareholders

New Zealand

PTE LTD

Private limited company – maximum of 50 shareholders

Singapore

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In theory, individual directors do not become bankrupt and they can start up in business immediately afterwards. In practice, however, directors are personally liable if they knowingly allow the company to trade when there is no reasonable expectation that it can pay its debts as determined by an insolvency practitioner. Furthermore, a firm’s creditors and banks who finance a firm will often ask the directors to personally guarantee the debt before trading accounts can be opened. A private company in Australia is referred to as a proprietary limited company (Pty Ltd). A Pty Ltd is the opposite of a public company. For example, a Pty Ltd cannot invite the public to invest or deposit money with it, whereas a public company can raise capital by offering shares to the public by issuing a prospectus. • Advantages of a private company: – liabilities of the shareholders and directors are limited to their subscribed share capital and any debts that are personally guaranteed – the company is a separate legal entity, which may enter into agreements, can be sued and can sue others – retained profits are taxed at the company income tax rate – ease in attaining ownership in the company by acquiring shares – ease of ownership change – additional capital is more available to this type of legal structure – shares are transferable and the authority of shareholders can be controlled through the type of shares issued – continuity of the company’s existence – not dependent on the owners. • Disadvantages of a private company: – set-up, administrative and operating costs are high – increased statutory requirements for taxation and corporation law – revenue and capital losses must be retained by the company – these cannot offset the owners’ incomes.33

Public company In Australia, a public company is indicated by the word ‘Limited’ or the abbreviation ‘Ltd’ at the end of the company’s name, for example BHP Billiton Limited. ‘PLC’ indicates that a company is a public company in many other Commonwealth jurisdictions. A public company is a type of limited company whose shares may be offered for sale to the public. The abbreviation Ltd or PLC status is roughly equivalent to a US corporation. It is not compulsory for a public company to ‘float’ its shares by making an Initial Public Offering (IPO). However, many do float and their shares are then usually traded on the stock exchange. The following offers a summary of the key advantages and disadvantages of the PLC. • Advantages of a public company: – essentially those of a private company, plus – increased potential for raising finance by share issues to the public or through other financial investors. • Disadvantages of a public company: – most expensive set-up cost of all forms of business organisation considered – if shares are traded publicly, more open to hostile takeover bids – tighter levels of regulation

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– public ownership by minority shareholders does not provide them (as owners) with any real control of the business – majority shareholders have a stronger voice at shareholder meetings and can sway business decisions. For more on owning shares in a limited company, common stock and preferred stock in public companies, see Chapter 14.

QUASI-INCORPORATED BUSINESSES Limited partnerships are used in situations (for example, passive investor) where capital investment comes without responsibility for management and without liability for losses beyond the initial investment. Such an organisation allows the right to share in the profits with limited liability for the losses. The advantage of the limited liability partnership is that it allows an investor to invest in a partnership without being liable beyond the extent of their financial investment, provided certain conditions are met. Limited partners may not: • draw out or receive back any part of their contribution to the partnership during its lifetime • take part in the management of the business or have power to bind the firm. We have referred to these entities as quasi-incorporated as they share some similarities with both incorporated and unincorporated business structures. However, strictly speaking, limited liability partnerships are unincorporated while limited partnerships are incorporated.

Limited liability partnership In a limited liability partnership (LLP) structure, the liability of a partner contributing capital can be limited to the amount of financial contribution, provided that person does not take part in the management of the business. LLPs are particularly common in oil and gas exploration, in motionpicture ventures and in venture capital investments. A general partner in a limited partnership has unlimited liability and therefore is personally liable for the debts of the firm. However, a limited partner can be an investor whose liability is limited to the size of the investment they make and who can only be involved in the firm’s management in certain prescribed circumstances. The standard features of limited partnerships include flow-through tax status, limited liability for passive investment partners and separate legal personality.

Incorporated limited partnership An incorporated limited partnership (ILP) is a form of a limited partnership and is a relatively recent development in Australia, although the US equivalent (confusingly entitled a limited liability company or LLC) has been in existence for some time. The ILP has been developed in response to calls by venture capital and private equity investors for more flexible investment vehicles. An incorporated limited partnership is a partnership with the capacity and powers of an individual as well as the powers of a company as a separate legal entity. It can have up to 20 general partners and an unlimited number of limited partners. As with all limited partnerships the limited partners are not entitled to participate in management, and general partners have unlimited liability. • Advantages of an ILP: – limited liability for limited partners – flow-through taxation – that is, each partner of the ILP is taxed based on their pro rata portion of the ILP’s taxable income – the partners can also have the benefit of any losses incurred by the ILP to offset against other taxable income which they may have.

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• Disadvantages of an ILP: – only able to be used for limited investment purposes – short life span of between five and 15 years – must have minimum investment funds of $20 000 000 – means that substantial investment is required before ILP structure can be implemented.

UNINCORPORATED BUSINESSES There are two very frequent forms of doing business that are called unincorporated; that is, not organised and maintained as a legal entity.

SOLE TRADERSHIP Most entrepreneurs start out as ‘sole traders’. A sole trader (also known as a sole proprietor) is a business that is owned and operated by one person. The enterprise has no existence apart from its owner. This individual has a right to all of the profits and bears all of the liability for the debts and obligations of the business. The individual also has unlimited liability, which means their business and personal assets stand behind the operation. If the company cannot meet its financial obligations the owner can be forced to sell the family car, house and whatever assets that would satisfy the amounts owing to the creditors. To establish a sole tradership a person merely needs to obtain the permissions or licences that are necessary in the field to begin operations. One must also normally apply for registration of the business name with the relevant state or territory department. In Australia, an Australian Business Number (ABN) is not compulsory but is recommended due to pay-as-you-go withholding obligations of suppliers that can also ease accrued tax burdens payable at financial year ends. Because of its ease of formation, the sole tradership is the most widely used legal form of organisation.34 • Advantages of sole traderships: – ease of formation – it is an inexpensive business structure to establish and maintain and it has the least government reporting requirements – losses reduce personal taxes – in both Australia and New Zealand, losses from the business can be offset against any other income or future earnings – less formality and fewer restrictions are associated with establishing a sole tradership than with any other legal form – sole ownership of profits – the proprietor is not required to share profits with anyone – decision making and control vested in one owner – no co-owners or partners must be consulted in the running of the operation – flexibility – management is able to respond quickly to business needs in the form of dayto-day management decisions as governed by various laws and good sense – relative freedom from governmental control – very little governmental interference occurs in the operation, although there may be considerable compliance costs – freedom from corporate business taxes – proprietors are taxed as individual taxpayers and not as businesses – easy to wind it up – it is easy to close the company and stop trading. • Disadvantages of sole traderships: – there are few tax concessions – if the business is successful, the personal tax rate in Australia and New Zealand may be higher than the company rate

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– unlimited liability – the individual proprietor is personally responsible for all business debts and this liability extends to all of the proprietor’s assets – lack of continuity – the enterprise may be crippled or terminated if the owner becomes ill or dies – lack of personal freedom – it may not be possible to take holidays, as there is nobody else with the expertise to run your business while you are away; the same problems arise with sickness or accidents – less available capital – ordinarily, proprietorships have less available capital than other types of business organisations, such as partnerships and corporations – relative difficulty obtaining long-term financing – because the enterprise rests exclusively on one person it often has difficulty raising long-term capital – relatively limited viewpoint and experience – the operation depends on one person and this individual’s ability, training and expertise will limit its direction and scope.

PARTNERSHIPS Partnerships emerge in various ways. A sole trader may reach a stage where further growth requires the taking on of a partner. Alternatively, two or more people may decide to combine their skills and resources to start a business in partnership with each other. In a partnership, a group of people contribute their time, talents and money towards the business. In return they share the responsibilities and profits. A partnership can be created by oral or written agreement, but a written agreement is preferable. In the absence of a formal partnership agreement, the law will assume that each partner has an equal share in the business. If, for example, one partner is contributing more money or time, the partnership agreement will normally provide that they have a greater share in the business. By clearly spelling out in the partnership agreement what has been agreed upon, the likelihood of disputes is reduced. • Advantages of partnerships: – ease of formation – legal formalities and expenses are few compared with those needed to create a more complex enterprise, such as a corporation – direct rewards – partners are motivated to put forth their best efforts by direct sharing of the profits – flexibility – in a partnership, it is often possible to obtain more capital and a better range of skills than in a sole proprietorship – responsiveness – a partnership often is able to respond quickly to business needs in the form of day-to-day decisions – relative freedom from governmental control and regulation – very little governmental interference occurs in the operation of a partnership – confidentiality – partnerships do not have to disclose profits to the public. • Disadvantages of partnerships: – few tax concessions – most partnerships pay taxes as individuals and the personal tax rate in Australia and New Zealand may be higher than the company rate – unlimited liability of at least one partner – although some partners can have limited liability (as in limited partnerships), at least one must be a general partner who assumes unlimited liability – lack of continuity – if any partner dies or simply withdraws from the business, the partnership arrangement ceases (however, operation of the business can continue based on

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the right of survivorship and the possible creation of a new partnership by the remaining members or by the addition of new members) – relative difficulty obtaining large sums of capital – most partnerships have problems raising capital, especially when long-term financing is involved; usually the collective wealth of the partners dictates the amount of total capital the partnership can raise, especially when first starting out – bound by the acts of just one partner – a general partner can commit the enterprise to contracts and obligations that may prove disastrous to the enterprise in general and to the other partners in particular – difficulty in exit strategy – if the partnership is dissolved or altered, difficulties may be experienced in obtaining an acceptable valuation or in raising capital to purchase a retiring partner’s share – difficulty of disposing of partnership interest – buying a partner out may be difficult unless specifically arranged for in the written agreement. It is important to correctly draw up the partnership agreement from the beginning. Uncertainty and ambiguity may come back to haunt a venture. Let us say that Alice, Bette and Cathy work as partners without an explicit agreement. The three women lease a factory as tenants in common and produce widgets. Each receives one-third of the profits. Later, Alice signs a contract for some plant and equipment to produce the Mark II widget. However, their business falters and Alice has to go back on the contract. Then, for totally unrelated reasons, Alice is declared bankrupt and the supplier sues for breach of contract. The court determines that Alice, Bette and Cathy were in fact partners. Alice is found to have bound the partnership to the equipment contract. As Alice has gone bankrupt, Bette and Cathy are ordered to pay all of the supplier’s damages and costs.35 You can confirm your understanding and test your entrepreneurial knowledge on sole traders and partnerships in the ‘Get it right’ exercise at the end of this chapter.

OTHER BUSINESS FORMS TRADING TRUST A common alternative business form in Australia and New Zealand is the trading trust. It is very much like a family trust, except that it is able to operate as a business with the added advantage of being able to pay money (profits) to the beneficiaries without them having to work in the business (unlike a company). A trading trust can ring-fence assets and insulate professional life from personal life when, for example, a doctor or dentist is facing malpractice or medical misadventure claims.

COOPERATIVE SOCIETY The main difference between a cooperative society and companies is dividend distribution. Under a company structure there is a profit motive that returns dividends to shareholders of the company. A cooperative, in contrast, operates on a service motive that provides services to its members or on behalf of its members and any return of capital to members is limited. Each member contributes capital and shares in the control of the firm on the basis of a one member, one vote principle. In other ways, it is run in a similar fashion to a company.36

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CHARITABLE TRUST A familiar form of non-profit corporation (or not-for-profit) is the religious, charitable or educational organisation. Its purpose is not to make a profit, but it is permitted to do so if the profit is left within the trust.

FRANCHISES Actually, a franchise is not a legal form per se; it could be any one of the structures we have discussed. However, we include it here because it is a consideration as entrepreneurs launch new ventures (see also pages 175–9). A franchise is any arrangement in which the owner of a trademark, trade name or copyright has licensed others to use it in selling goods or services. A franchisee (a purchaser of a franchise) is generally legally independent but economically dependent on the integrated business system of the franchisor (the seller of the franchise). In other words, a franchisee can operate as an independent businessperson but still realise the advantages of a regional or national organisation.37 What business legal structure should a franchise have? There is no right or wrong answer to this question. A franchise can be any of the forms discussed in this chapter. The differences relate to tax treatment and liability. Franchise entrepreneurs should take care to protect their personal assets from business liability in relation to contracts they execute; for example, lease contracts and supplier contracts. For this reason many new franchisees are more interested in the corporate form for its tax differences than for its potential liability protection although the importance of protection of personal assets in this decision should not be ignored. The advantage they see is the potential that corporate income will be subject to tax rates lower than personal income rates. There are also possible benefits related to increased options for retirement accounts and different treatment of certain income tax deductions (see also related text on franchising in Chapter 6).

FINAL THOUGHTS ON LEGAL FORMS An entrepreneur should always seek professional legal advice in order to avoid misunderstanding, mistakes and added expenses. The average entrepreneur encounters many diverse problems and stumbling blocks in venture formation. Since they do not have a thorough knowledge of law, accounting, real estate, taxes and governmental regulations, an understanding of certain basic concepts in these areas is imperative. The material in this chapter is a good start towards understanding the legal forms of organisations. It can provide entrepreneurs with guidelines for seeking further and more specific advice on the legal form that appears most applicable to their situation. The following key questions can be helpful for placing legal forms of business in perspective. • What is the size of the risk? What is the amount of the investor’s liability for debts and taxes? • What would the continuity (life) of the firm be if something happened to the principal(s)? • What legal structure would ensure the greatest administrative adaptability for the firm? • What effects will federal, state and local laws have on the operation? • What are the possibilities of attracting additional capital? • What are the needs for and possibilities of attracting additional expertise? • What are the costs and procedures associated with starting the operation? • What is the ultimate goal and purpose of the enterprise and which legal structure can best serve this purpose?

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INSOLVENCY AND BANKRUPTCY ‘Looking back on it, my judgement was often terribly wrong’, said one entrepreneur who had burned through more than $20 million trying to launch an Internet-based business. ‘Unfortunately, I was never in doubt.’38 When a business fails, the company becomes insolvent and is placed into liquidation. A business is insolvent when it cannot pay its debts as, and when, they fall due. Australian laws relating to insolvency are governed by the Corporations Act 2001. On the other hand, in Australia, when a person cannot pay their debts when and as they fall due they can declare bankruptcy or be declared bankrupt. The laws in Australia relating to bankruptcy apply to people, not companies, and are governed by the federal Bankruptcy Act 1966 and later amendments. This distinction between person and company is important for an entrepreneur when considering business entity forms and decisions but the distinction may not be reflected in the use of the term ‘bankruptcy’ in law in all countries. For instance, in US law the term bankrupt can apply to a company or a person. How do we define business failure? According to Shepherd, it occurs: … when a fall in revenues and/or rise in expenses are of such magnitude that the firm becomes insolvent and is unable to attract new debt or equity funding; consequently, it cannot continue to operate under the current ownership and management.39

In other words, insolvency occurs when a venture’s financial obligations are greater than its assets and the venture cannot meet its debt repayment obligations. Shepherd and colleagues observe three overarching reasons for business failure. • The liability of newness: There are higher costs for new firms in learning new tasks. Organisational conflicts are higher in new firms. There are barriers to entry for new firms. Competitors will sometimes commit unethical acts against new start-ups. • Overconfidence: Entrepreneurs rank their chances of success at over 70 per cent. Perhaps there is a ‘hubris theory of entrepreneurship’. • Lack of experience: Entrepreneurs with more experience will generally possess the knowledge to perform more effectively the roles and tasks necessary for success.40 No entrepreneur intentionally seeks bankruptcy although when there is no other avenue an entrepreneur can initiate proceedings for bankruptcy. Problems that lead to insolvency can occasionally arise out of the blue but here are several circumstances that may foreshadow impending failure: • new competition enters the market • other firms seem to be selling products that are a generation ahead • the research and development budget is proportionately less than the competition’s • being overstocked.41 Some of the more imminent warning signs that a firm may be trading while insolvent include: • poor cash flow • increasing debt • letters of payment demands, summonses, judgements or warrants • problems selling stock or collecting debts • overdue taxes or superannuation liabilities.42 To decrease your risk of insolvency it is recommended that you have a current business plan along with good and well-organised financial records.

Would you recommend bankruptcy or not? All she needs is a little more breathing room. Read about it on CourseMate Express.

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The rate of bankruptcy differs from country to country. It’s not unusual for countries like New Zealand and the US to have relatively high ‘churn’ or firm failure and that can lead to bankruptcy. Other countries, such as Thailand, South Korea and Japan, can have extraordinarily low rates of bankruptcy. However, entrepreneurs discontinue association with their businesses for many reasons and the Global Entrepreneurship Monitor reveals that a substantial number of entrepreneurs plan to close or sell the business as an exit strategy or close to pursue other job or business opportunities.43 In various countries bankruptcy carries a social stigma with it.44 The society sees it as a sign of financial irresponsibility and failed entrepreneurs often find it difficult to obtain credit. The entrepreneur may suffer from loss of esteem and other negative social attitudes. The recovery from failure has been likened to the grieving process associated with losing a loved one and it is proposed that through this process an entrepreneur benefits through learning.45 Moreover, at an industry level, firm failure is part of the natural life cycle which improves the quality of the survivor pool delivering significant and substantial cost benefits to the industry.46 Even failure in entrepreneurship has its upside.

THE LEGAL FRAMEWORK REGULATING CLIMATE CHANGE On CourseMate Express read about a short history of climate change negotiations before Copenhagen. Are you up to speed?

From outer space you can view a huge layer of air pollution that covers parts of the northern Indian Ocean, India, Pakistan, and parts of South Asia, South-West Asia and China. It’s called the ‘Asian brown cloud’, a giant brown stain hanging in the air over much of Asia and the Indian Ocean every year between January and March. Interestingly, while the developed world struggles with the challenge of reducing CO2 emissions and for many, such as Australia and the US, the challenge is to turn the rate of increase around, the developing nations face a double-barrelled problem. As developing nations pursue the standard of living enjoyed by developed nations, inevitably the trend of CO2 emissions for these countries will continue to grow47 (refer to Figure 13.4). For all developing nations, but especially large population nations, this is a serious dilemma for not only single nation governments but all the world’s governments. The impact of increasing wealth in countries like China and India will be to dramatically increase CO2 emissions as demand for ever more energy-hungry goods increases. Therefore, governments have a key role to play in attempting to manage this situation with legislation and regulation that will help stem and reduce the negative impact of the human race on the planet itself. The first and perhaps most successful regulation put on business had to do with air-conditioning and refrigeration. Back in 1987, the United Nations outlawed the use of chlorofluorocarbons (CFCs) in the Montreal Protocol on Substances that Deplete the Ozone Layer. Not only is this one of the first examples of international cooperation to limit greenhouse gases but it also shows how business can benefit by taking up the challenges imposed by regulations. CFCs had four main uses: cooling agents in refrigeration and air-conditioners, solvent to clean electronic equipment, a propellant in aerosol sprays and a foaming agent in packaging. DuPont alone produced one-quarter of the world’s CFC, which it marketed as Freon. But the company decided to support international controls on CFCs and to devote millions to research on substitutes. There are strong signs that the ozone layer will recover within the next 100 years. What the Montreal Protocol did was recognise the importance of stimulating and developing new technologies so that industry could use non-depleting alternatives and provide developing countries access to these technologies.48

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China

Industrialised countries (Annex I)

United States

1990

EU27

2000

EU15

2010

India Developing countries

Russian Federation

1990

Japan

2000

Germany

2010

South Korea Canada United Kingdom Indonesia Mexico Brazil Saudi Arabia Italy Australia Iran South Africa France Poland Ukraine Spain Taiwan Thailand Netherlands 0

2000

4000

6000

8000

10 000

million tonnes CO2 Source: Olivier, J. G. J., Janssens-Maenhout, G., Peters, J. A. H. W. & J. Wilson (2011), Long-term trend in global CO2 emissions. 2011 report. Copyright ª 2011 PBL Netherlands Environmental Assessment Agency, The Hague, 2011; European Union.

Companies with international operations are today increasingly subject to various emissions regulations and standards in key markets. There already has been a move to regulate greenhouse gases at the level of international conventions sponsored by the United Nations. The United Nations Framework Convention on Climate Change and the Kyoto Protocol (see below) embodied the

FIGURE 13.4 CO2 EMISSIONS FROM FOSSIL FUEL USE AND CEMENT PRODUCTION FROM THE TOP 25 CO2 EMITTING COUNTRIES – 1990, 2000 AND 2010

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core principles of a multilateral response to climate change, a trend continued at the UN Climate Change conference in Durban in 2011 and again in Lima, Peru in 2014. The meeting of the Party nations, which included Australia, New Zealand and Japan, agreed to adopt a universal legal agreement on climate change as soon as possible but by no later than 2015. It was agreed in Lima that ideally by March 2015 all participating countries would pledge action to reduce greenhouse gas emissions. However, the Lima agreement, known as the Lima Call for Climate Action, fell short of outlining specifics and the next meeting in Paris to be held in late 2015, will be key to defining the actions of subscribing nations.49

ENTREPRENEURSHIP

EFFECTS OF CLIMATE CHANGE ARE RESTRUCTURING THE BUSINESS ENVIRONMENT IN ASIA–PACIFIC Here are examples of how climate change regulations are affecting business in our region.

IN PRACTICE

Asian building industry The increasing effects of climate change on temperatures in various countries across the Asia– Pacific will inevitably impact the building industry in the region. The industry will have to adapt to these changes, focusing on energy efficiency and renewable energy to combat the hike in electricity consumption, tariffs and operational costs. China and India present the highest market potential for climate change technologies due to their sheer size. Among developed economies, Singapore and Australia provide significant scope in the overall climate change market in the building industry. Scientific research on climate change will also be critical in opening doors to immediate and mid-term remediation opportunities for climate change mitigation in Asia–Pacific’s building industry. Australian pork industry Australian pork farmers are suffering through drought and climate variability that causes feed shortages, reduces water availability and increases costs for electricity, fuel, fertiliser and transportation. This means that producers and processors will face new compliance costs such as reporting for electricity and water, carbon labelling, and marketing/ label requirements for exports. Sources: Frost & Sullivan, 18 September 2014, http://ww2.frost.com/news/press-releases/effects-climate-change-are-restructuring-buildingindustry-asia-pacific-finds-frost-sullivan; Australian Pork, Climate Change Research Strategy for Primary Industries (n.d.), ‘The Australian pork industry: Understanding climate change impacts’, ISBN PDF/Electronic 978-1-921664-15-1, http://lwa.gov.au/files/products/climate-changeresearch-strategy-primary-industrie/pn30196/australian-pork-industry-understanding-climate-cha.pdf.

The international response to climate change dates back to 1979 when the first World Climate Conference highlighted concerns arising from increased carbon dioxide in the atmosphere. In 1988 the UN General Assembly passed a resolution, proposed by Malta, in favour of the protection of the climate for present and future generations. In the same year the World Meteorological Organization and the United Nations Environment Programme jointly created the Intergovernmental Panel on Climate Change (IPCC). The IPCC issued its First Assessment Report in 1990, confirming that climate change was a real concern and that human activities were likely to be contributing to it. In recognition of the global nature of the problem, the United Nations Framework Convention on Climate Change (UNFCCC) was agreed at the Earth Summit in Rio de Janeiro in 1992. All major developed and developing countries, 189 in all, have ratified the Convention.50 The UNFCCC sets the overarching objective for multilateral action: to stabilise greenhouse gas concentrations in the atmosphere at a level that avoids dangerous human-caused climate change. It also establishes key principles to guide the international response, in particular that countries should act consistently with their responsibility for climate change as well as their capacity to do so, and that developed countries should take the lead given their historical contribution to greenhouse gas emissions. The Convention

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places a commitment on all signatories to act. Whereas for developing countries this commitment is unquantified and linked to assistance from developed countries, the developed countries agreed to return greenhouse gas emissions to 1990 levels by 2000. The Kyoto Protocol is the key international agreement on climate change that tied 36 industrialised nations to caps on greenhouse gas emissions by 2012. In Durban, the Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP) was established51 to further develop the work and produce, no later than 2015, another protocol with agreed outcomes and with legal force under the UNFCCC, applicable to all Parties. The goal is to have a legally enforceable instrument come into effect and be implemented from 2020 by the signatory nations. The Kyoto Protocol was an important step in addressing climate change, but a dramatic ramp-up on environmental regulation is the next big thing that entrepreneurial businesses must tackle. Interestingly, researchers are beginning to lay blame squarely at the feet of business claiming ‘that nearly two-thirds of historic carbon dioxide and methane emissions can be attributed to 90 entities’.52 The vast majority of these firms were energy companies producing oil, gas and coal while a few were cement manufacturers. More than half were investor owned companies while a third were state-owned enterprises. Given the increasing awareness of climate change and the role of business in bringing it about, entrepreneurs can expect the policy and regulatory environment to adapt and produce such policies as the introduction of carbon pricing schemes, providing support for research and development in zero-carbon technologies and processes, imposing mandatory energy efficiency standards, and raising investment in network infrastructure such as public transport systems and smart electricity grids.53 A coordinated approach to policy measures will be critical in order to improve the productivity of energy and natural resource use, reduce ‘policy risk’ to create a conducive environment for private investment in clean infrastructure and encourage innovation in low/zerocarbon and environmental industries. Innovation will be a particularly important policy instrument to help reduce the cost of zerocarbon technologies, making them cheaper than high-carbon incumbent products and services. Furthermore, innovation in clean technologies will produce higher levels of ‘knowledge spillover’ into other sectors of the economy to create opportunities for a diverse range of new goods and services.54

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SUMMARY The regulatory environment for Asia–Pacific entrepreneurs is varied and complex. Doing business in Australia or New Zealand is quite different from doing business in Singapore or other countries in our region. While the entrepreneur does not need to be expert in all the areas of law they do hold the responsibility for ensuring that they, their firms and employees comply with such laws as business formation, contract enforcement, credit regulations, international trading regulations, investor protection, labour regulations, licensing and permits and property laws. A patent is an intellectual property right that is a result of a unique invention. Patent holders have certain rights that can be defended against infringement by others. A copyright provides exclusive rights to creative individuals for the protection of their literary or artistic productions. This protection extends beyond the life of the author for periods of plus 50 or 70 years in most countries. In case of infringement, the author (or whoever holds the copyright) can initiate a lawsuit for infringement. This action can result in an end to the infringement and, in some cases, the awarding of financial damages. A trademark is a name, mark, symbol or motto identified with a company’s product(s) or services. When an organisation registers a trademark, it has the exclusive right to use that mark. Registration is for 10 years and is renewable every 10 years thereafter. In case of infringement, the trademark holder can seek legal action and damages. New forms of business require new forms of intellectual property protection. On the Internet it is important to protect domain names and trademarks. There are international provisions available through the World Intellectual Property Organization (WIPO) that greatly speed up enforcement of provisions. Trade secrets can include business processes and information that may be unpatentable and their protection is only possible with employer and employee cooperation. Prosecution is still difficult in many of these cases. There are numerous rogue states and overseas havens when it comes to intellectual property rights protection. The wise entrepreneur has protections in place to guard against profit rip-offs. The chapter then turned to examine the major forms of legal organisation. The advantages and disadvantages of each form were highlighted and compared. In addition, the characteristics and tax considerations of partnerships were compared with those of corporations. The specific forms of partnerships and corporations were examined. In particular, the requirements and benefits of limited partnerships, incorporated limited partnerships and limited liability companies were presented. Additional corporation classifications were reviewed and a section was devoted to the issues of insolvency and bankruptcy relevant to entrepreneurs. Environmental regulations already exist in key markets. A number of countries are close to a ‘tipping point’ that will result in greater regulatory involvement in climate issues and a resulting change in corporate behaviour.

KEY TERMS AND CONCEPTS asset protection bankruptcy business failure business formation cooperative society copyright corporation design registration domain name double taxation environmental protection fair use doctrine

Entrepreneurship

flow-through taxation Inc. incorporated company incorporated limited partnership (ILP) incorporation intellectual property rights (IPR) investor protection Kyoto Protocol labour regulations limited liability

Review key terms with interactive flashcards

limited liability partnership (LLP) limited partnerships

Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 489

non-profit organisations partnership patent piracy property laws proprietary limited company (Pty Ltd)

public limited company regulatory body rogue state sole tradership taxation trade secrets

trademark trading trust unincorporated businesses United Nations Framework Convention on Climate Change unlimited liability

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Briefly discuss how the decision to start a business in different countries may be affected by the local legal and regulatory environment. In your own words, what is a patent? Of what value is a patent to an entrepreneur? What benefits does it provide? What are seven basic rules entrepreneurs should remember about securing a patent? When can a patent be declared invalid? Cite two examples. Explain why an entrepreneur might decide against patenting as a protection strategy and briefly describe the potential consequences of such a decision. In your own words, what is copyright? What benefits does copyright provide? How much protection does copyright afford the owner? Can any of the individual’s work be copied without paying a fee? Explain in detail. If an infringement of copyright occurs, what legal recourse does the owner have? In your own words, what is a trademark? Why are generic or descriptive names or words not given trademarks? When might a trademark be invalidated? Explain. What is a domain name? Give some examples of interesting cases of domain name infringement. What are trade secrets? Why has Coca-Cola benefited from protecting its formula through trade secret rather than patenting the formula? Discuss how the choice of legal form of the business entity may be influenced by being a social entrepreneur. Define each of the following: sole tradership, partnership and corporation. What are the specific advantages and disadvantages associated with each primary legal form of organisation? Name three specific types of partners. How do they differ? Explain the limited liability partnership. How does a limited partnership work? Give an example. What is a proprietary limited (Pty Ltd) company and why would an entrepreneur choose to adopt this legal form of entity over being a sole trader? What is the equivalent form of the Pty Ltd company in Singapore, Malaysia and India? Give your own examples of rogue states or overseas havens when it comes to intellectual property rights protection. What was the first (and perhaps) the most successful global environmental regulation? What impact has the Kyoto Protocol had on entrepreneurs and how has the Paris meeting of the UN Framework Convention on Climate Change in 2015 altered, extended or otherwise amended the Kyoto Protocol? What do you foresee in terms of future environmental regulations that will undoubtedly affect entrepreneurial ventures?

EXPERIENCING ENTREPRENEURSHIP Get it right The following list of advantages and disadvantages is associated with sole traderships, partnerships and corporations. Place an S next to those that relate to sole traderships, a P next to those that relate to partnerships and a C next to those that relate to companies. If the advantage or disadvantage applies to more than one type of organisational form, put all answers on the accompanying line. Answers are provided at the end of the chapter.

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ADVANTAGES

DISADVANTAGES

1 Limited liability

1 Unlimited liability

2 Sole ownership of profits

2 Governmental regulation

3 Unlimited life

3 Lack of continuity

4 Ease of formation

4 Double taxation

5 Flexibility

5 Difficulty obtaining large sums of capital

6 Transfer of ownership

6 Organising expenses

7 Relative freedom from governmental control

7 Relatively limited viewpoint and experience

8 Increased ability and expertise.

8 Activity restrictions

EXPERIENCING ENTREPRENEURSHIP What kind of trademark? For each of the following trademarks, indicate whether you think it is suggestive, fanciful, arbitrary or generic by placing an S, F, A or G alongside. Answers are provided at the end of the chapter. 1 COPPERTONE for suntan oil 2 REEBOK for shoes 3 ROACH MOTEL for insect traps 4 MERCURY SOFTWARE for software that speeds communication 5 PHOENIX VENTURES for an investing firm that focuses on investing in failing companies and reviving these companies 6 ARETE COACHING for life coaches (‘arete’ is the Greek word for ‘overall excellence’) 7 QANTAS 8 AIR NEW ZEALAND

EXPERIENCING ENTREPRENEURSHIP Protecting your legal interests Entrepreneurs need to know how to legally protect their interests in a property or work. The most effective way to gain legal protection is to obtain a copyright or a trademark. Two definitions – (1) and (2) – are given here. Place a C next to the one that defines copyright; place a T next to the one that defines a trademark. Then, on the list underneath (a to j), place a C next to each item that could be protected with copyright and a T next to each item that could be protected with a trademark. Answers are provided at the end of the chapter. 1 A distinctive name, mark, symbol or motto identified with a company’s product 2 An exclusive protection of a literary or an artistic production a Best-selling novel b Logo c Company’s initials (such as IBM or ITT) d Motion picture e Word (such as Coke or Pepsi)

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Chapter 13: Legal and regulatory challenges for entrepreneurial ventures 491

f g h i j

Computer program Musical comedy Slogan Stage play Symbol

CASE STUDIES CASE 13.1 Gloria’s decision When Gloria Talavera opened her boutique in Manila six years ago, she had only one full-time employee. Since then Gloria has added two general partners and greatly expanded the operation. Over the past year, it has become obvious that the group could open another boutique that would be equally successful. The problem is money. The partnership lacks funds for expansion. Gloria’s banker has suggested that the partnership borrow $200 000 from the bank and pledge the business assets as collateral. ‘This will get you the money you need and once you have the boutique going, you can repay the money’, he told them. The idea sounds fine to the partners, although they are concerned about the risk involved. If the second boutique does not do well, it could affect the success of the first boutique by siphoning off funds to repay the loan. Gloria has been thinking about incorporating the business, selling shares and using these funds for expansion purposes. She has not shared this idea with her banker because she wants to give it more thought, but she intends to talk it over with her partners later in the week. QUESTIONS

1 2

What are the benefits of incorporating a company to operate the business and raising money through the issue of shares? Is this a better idea than the banker’s proposal of taking a $200 000 loan? Why or why not? What would you recommend to Gloria? Explain in detail.

CASE 13.2 A patent matter Technological breakthroughs in the machine industry are commonplace. Thus, whenever one company announces a new development, some of the first customers are that company’s competitors. The latter will purchase the machine, strip it down, examine the new technology and then look for ways to improve it. The original breakthroughs always are patented by the firm that discovers them, even though the technology is soon surpassed. A few weeks ago, Tom Farrington completed the development of a specialised lathe machine that is 25 per cent faster and 9 per cent more efficient than anything currently on the market. This technological breakthrough was a result of careful analysis of competitive products. ‘Until I saw some of the latest developments in the field,’ Tom told his wife, ‘I didn’t realise how easy it would be to increase the speed and efficiency of the machine. But once I saw the competition’s products, I knew immediately how to proceed.’ Tom has shown his machine to five major firms in the industry, and all have placed orders with him. Tom has little doubt that he will make a great deal of money from his invention. Before beginning production, however, Tom intends to get a patent on his invention. He believes his machine is so much more sophisticated and complex than any other machine on the market that it will take his competitors at least four years to develop a better product. ‘By that time, I hope to have improved on my invention and to continue to remain ahead of them,’ he noted. Tom has talked to an attorney about filing for a patent. The attorney believes that Tom should answer two questions before proceeding: (1) How long will it take the competition to improve on your patent? (2) How far are you willing to go to defend your patent right? Part of the attorney’s comments were as follows: ‘It will take us about three years to get a patent. If, during this time, the competition is able to come out with something that is better than what you have, we will

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have wasted a lot of time and effort. The patent will have little value because no one will be interested in using it. Since some of your first sales will be to the competition, this is something to which you have to give serious thought. Second, even if it takes four years for the competition to catch up, would you be interested in fighting those who copy your invention after, say, two years? Simply put, we can get you a patent, but I’m not sure it will provide you as much protection as you think.’ QUESTIONS

1 2 3

Given the nature of the industry, how valuable will a patent be to Tom? Explain. If Tom does get a patent, can he bring action against infringers? Will it be worth the time and expense? Why or why not? What do you think Tom should do? Why?

CASE 13.3 New Zealand and kiwifruit There are at least three things named ‘kiwi’. There’s the flightless endangered ground dwelling bird in the New Zealand forest. There is the fruit, a relative of the Chinese gooseberry. And there are the people of New Zealand, who are often referred to as Kiwis. The 100th year that the Chinese gooseberry (aka kiwifruit) arrived on New Zealand shores from China was marked in 2004. For years, New Zealand dominated the production of the fruit, but since the early 1990s it lost ground to foreign producers and lost control of the intellectual property related to its production. While New Zealand was one of the first to export kiwifruit, its history began in China. In 1904, girl’s college headmistress Isabel Fraser brought kiwifruit from the Yangtze valley to New Zealand and called it ‘Chinese gooseberries’. By the mid-1920s horticulturalist Hayward Wright had developed its shape, colour, fuzzy skin and cool-lime taste. American sailors who landed during the Second World War were hooked on this exotic fruit and carried its reputation back home. By the 1950s New Zealand was supplying kiwifruit to the British market and was penetrating the American market through San Francisco. Branding advice suggested calling it the kiwifruit after the small national bird’s brown fur. As to the fruit’s parentage, one Chinese diplomat generously labelled the kiwifruit a ‘crystallisation of the profound friendship between two people’. Surprisingly, the world’s second largest production comes from Italy, followed by France, Japan and the US. This increased production led to a decline of kiwifruit prices between 1982 and 1988. Enter ‘Zespri’. Kiwifruit growers, with the support of the New Zealand Kiwifruit Marketing Board, re-engineered the fruit to have a golden colour and a soft honey-like taste. This led to huge growth of Zespri gold kiwifruit during the early 2000s. More importantly, they protected everything to do with its marketing including its ‘trade dress’ (everything that distinguishes it, the ‘total image’): ZESPRI Group Limited is the owner of all intellectual property rights connected with the ZESPRI brand and its associated visual identity and trade dress including ZESPRI, ZESPRI logo, D’LISH, D’LISH Logo, ZESPRI GREEN Kiwifruit, ZESPRI GOLD Kiwifruit, ZESPRI BRIGHT GREEN Colour and combinations of the ZESPRI BRIGHT GREEN and DARK GREEN Colours of the ZESPRI Visual Identity, ZESPRI RED Colour, ZESPRI GOLD Colour and a combination of the ZESPRI RED and GOLD Colours of the ZESPRI Visual Identity, zespri.com and related domain names in relation to kiwifruit and related products. Source: Rewritten from Shinyoung Yun, ‘New Zealand & kiwifruit’, TED Case Studies Number 758, 2004, http:// www.american.edu/TED/kiwi.htm QUESTIONS

1 2

What lessons did New Zealand kiwifruit growers learn from their experience? What remedies did they seek in developing a new variety of the fruit?

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ANSWERS TO ‘GET IT RIGHT’ ADVANTAGES

DISADVANTAGES

1C

1 S, P

2S

2C

3C

3 S, P

4 S, P

4C

5 S, P

5 S, P

6C

6C

7 S, P

7S

8C

8C

ANSWERS TO ‘WHAT KIND OF TRADEMARK?’ 1 2

S F

3 4

S S

5 6

S F

7 8

A G

ANSWERS TO ‘PROTECTING YOUR LEGAL INTERESTS’ 1 2a b

T C T

c d e

T C T

f g h

C C T

i j

C T

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals,

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eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. asset protection bankruptcy copyright fair use doctrine flow-through taxation franchise incorporated companies 1

2

3

incorporated limited partnership (ILP) incorporation intellectual property rights Kyoto Protocol limited liability limited liability partnership (LLP) non-profit organisation

patents piracy rogue states trade secrets trademarks United Nations Framework Convention on Climate Change

In this chapter we have tended to emphasise formal means of protecting intellectual property (IP). In the article by Seliina Pa¨a¨llysaho and Jari Kuusisto (2011), ‘Informal ways to protect intellectual property (IP) in KIBS businesses’ in Innovation: Management, Policy and Practice, 13(1), 62–76, a number of informal strategies are outlined and discussed. Review the article and discuss the limitations or virtues of adopting such informal practices for the entrepreneurial knowledge-based firm. The article by Marjorie Kelly and Allen L. White (Spring 2009), ‘From corporate responsibility to corporate design’ in The Journal of Corporate Citizenship, 33, 23–7, offers six principles for redesigning corporate architecture. Locate the article and review these principles. Discuss the positives and negatives for entrepreneurship of introducing laws in your country to provide an incentive for new firms to adopt such principles. The author Elissa Grossman has prepared a case study on ‘KenKen: The wisdom squared of puzzling businesses’ in 2013. In this case a number of opportunities are presented for the expansion of the licensing business. Review the case by accessing the journal Entrepreneurship Theory and Practice, 37(2) from page 435 and discuss the aspects of intellectual property protection and how the company can protect itself against piracy across the various business opportunities.

ENDNOTES 1 Dalai Lama & van den Muyzenberg, L. (2009). The leader’s way: The art of making the right decisions in our careers, our companies, and the world at large. New York: Crown Business, 163. 2 Cook, R. G. & Barry, D. (1993). When should the small firm be involved in public policy? Journal of Small Business Management, January, 39–50. 3 Much of the following discussion comes from World Bank. 2014. Doing Business 2015: Going Beyond Efficiency. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0351-2. License: Creative Commons Attribution CC BY 3.0 IGO. 4 World Bank. 2014. Doing Business 2015: Going Beyond Efficiency. 5 Centers for Disease Control (USA). Counterfeit drugs, http://www.cdc.gov/ features/CounterfeitDrugs; Williams, L. & McKnight, E. (2014). The real impact of counterfeit medications. U.S. Pharmacist, 39(6) (Generic Drug Review suppl.): 44–6, http://www.uspharmacist.com/content/s/ 312/c/48880/#sthash.wpUvM1A8.dpuf.

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6 Rosenberg, T. (2014). The fight against fake drugs. New York Times, 4 June 2014, http://opinionator.blogs.nytimes.com/ 2014/06/04/the-fight-against-fake-drugs. 7 International Intellectual Property Association (2014). Submission Regarding 2014 Special 301 Review: Identification of Countries Under Section 182 of the Trade Act of 1974, 79 Fed. Reg. 420 (3 January 2014), http://www.iipa.com/pdf/ 2014_Mar21_IIPA_USITC_Ditigal_Trade_ Part2.PDF. 8 International Intellectual Property Association (2014). Submission Regarding 2014 Special 301 Review. 9 Goetz, T. (2004). The eagle is grounded: While America works to protect intellectual property, everyone else is innovating. Wired, February. 10 International Intellectual Property Alliance. 2011 Special 301 Report on Copyright Protection and Enforcement. Available at http://www.iipa.com. 11 Ringleb, A. H., Meiners, R. E. & Edwards, F. L. (1996). Managing in the legal environment. St Paul, MN: West,

212–13. See also Allison, J. R. & Prentice, R. A. (1994). Business law (6th edn.). Fort Worth, TX: The Dryden Press: 194–7; Hefter, L. R. & Litowitz, R. D. What is intellectual property?, http://usinfo. state.gov/products/pubs/intelprp/ homepage.htm. 12 Choate, R. A. & Francis, W. H. (1981). Patent law: Trade secrets – copyright – trademarks. St Paul, MN: West, 1024–5; Clarkson, K. W. et al. (2001). West’s business law: Legal, ethical, international, and e-commerce environment (8th edn.). Mason, OH: South-Western/Thomson Learning, 131–6. 13 Gumpert, D. E. (2002). Burn your business plan! What investors really want from entrepreneurs. Needham, MA: Lauson Publishing. 14 Shaw, M. (2014). Yet another story of Chinese automotive counterfeiting? Engineering and Technology Magazine, 10 December 2014, http://eandt.theiet.org/ contribute/transport/land-wind-landrover.cfm.

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15 Reprinted with adaptations by permission of the Harvard Business Review. An excerpt from ‘Making patents work for small companies’, by Ronald D. Rothchild, July/August 1987, 24–30. Copyright ª 1987 by the President and Fellows of Harvard College; all rights reserved. See also David Pressman, Patent It Yourself: Your step-by-step Guide to filing at the US Patent Office, 15th edn (Berkeley, CA: Nolo Press, 2011). 16 Adapted from Boland, M. (2002). ASAP inventor’s guide to the fast lane. Forbes, 24 June, 72. 17 Fitzgerald, M. (2007). A patent is worth having, right? Well, maybe not. The New York Times, Your Money, 15 July, http://www.nytimes.com/2007/07/ 15/business/yourmoney/15proto.html. 18 Miller, R. R. & Jentz, G. A. (2011). Business law today (9th edn). South Western; Choate & Francis, Patent law, 932–45. 19 Australian Copyright Council (2014). An introduction to Copyright in Australia. Information Sheet G010v18, March 2014, http://www.copyright.org.au/find-ananswer/browse-by-a-z. 20 IP Australia, http://www.ipaustralia. gov.au/ip-infringement/enforcing-yourip/what-must-be-proven-to-enforceyour-ip. 21 Hancock, W. A. (1982). The small business legal advisor. New York: McGraw-Hill, 205–8. 22 Australian Copyright Council (2014). Fair dealing: What can I use without permission? Information Sheet G079v07, May 2014, http://www.copyright.org.au/ find-an-answer/browse-by-a-z. 23 See Field, T. G. Jr. (1990). Trademarks and business goodwill. Washington, DC: Office of Business Development, Small Business Administration. 24 Kenneth DeLeon. Trademark law basics, http://www.registeringatrade mark.com/trademark-law-basics.shtml. 25 Cohen, D. (1986). Trademark strategy. Journal of Marketing, January, 61–74. 26 Hemnes, T. M. S. (1985). How can you find a safe trademark? Harvard Business Review, March/April, 40–8. See also Finn, M. (1992). Everything you need to know about trademarks and publishing. Publishers Weekly, 6 January, 41–4. 27 Jentz et al., West’s business law, 137. 28 See Mallor, J. P., Barnes, A. J., Bowers, T. & Langvardt, A. W. (2007). Business law: The ethical, global, and ecommerce environment (13th edn). New York: McGraw-Hill Irwin, 234–8. 29 On the former, see Luigi Palombi (2014). Human DNA belongs to no one – it shouldn’t be patented. The Guardian,

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Monday 8 September 2014, http:// www.theguardian.com/commentisfree/ 2014/sep/08/human-dna-belongs-to-noone-it-shouldnt-be-patented, accessed 07/ 01/2015. Regarding the latter, in October 1999, Price-line.com sued Microsoft’s Expedia group for infringement of its patented ‘name your own price’ auction system, while Amazon.com, the leading Internet book retailer, sued its main rival, Barnes & Noble, for infringement of its patented ‘one-click’ ordering system in the US but has been unable to secure patent protection in Europe. See Rivette, K. G. & Kline, D. (2000). Discovering new value in intellectual property. Harvard Business Review, 78, January–February, 56, 66. 30 See Barlow, J. P. (1994). The economy of ideas: A framework for patents and copyrights in the digital age (everything you know about intellectual property is wrong). Wired 2.03, March; and Bergstra, J. & Klint, P. (2008). The software invention cube: A classification scheme for software inventions. Journal of Intellectual Property Rights, July, 293–300, that illustrates various strategies for protecting software property rights. 31 See for instance Chesborough, H. (2010). Business model innovation: Opportunities and barriers. Long Range Planning, 43, 354–63. 32 Musk, E. (2014). All our patent are belong to you. Tesla Blog, 12 June, http:// www.teslamotors.com/blog/all-ourpatent-are-belong-you. 33 New South Wales Department of State and Regional Development, ‘Business Structure’, http://www.smallbiz.nsw. gov.au. 34 For more on the sole tradership, see Miller, R. L. & Cross, F. B. (2010). The legal environment today (6th edn). SouthWestern. 35 Partnerships may exist in fact even if not in name, Coast Bulletin (Australia), 9 April 2005, 169. 36 NSW Department of State and Regional Development. Business structure – Frequently asked questions, http:// www.smallbiz.nsw.gov.au/smallbusiness/ ManagingþaþBusiness/LegalþIssues/ BusinessþStructureþFAQ. 37 Jentz et al., West’s business law, 730. 38 Cited in Shepherd, D. (2004). The theoretical basis for my plenary speech about our successes and failures at research on business failure. Paper presented at Second Annual International Entrepreneurship Research Exchange, Swinburne University of Technology, Melbourne, 10–11 February.

39 Cited in Shepherd, D. (2004). The theoretical basis for my plenary speech about our successes and failures at research on business failure. 40 Shepherd, D., Douglas, E. & Shanley, M. (2000). New venture survival: Ignorance, external shocks and risk reduction strategies. Journal of Business Venturing, 15(5), 393–410. 41 Platt, H. D. (1985). Why companies fail. Lexington, MA: Lexington Books, 83. 42 Australian Restructuring Insolvency and Turnaround Association (2014). Insolvency and company directors. Available at http://www.arita.com.au/ insolvency-you/item/lists/insolvencyexplained-topics/insolvency-andcompany-directors. 43 Bosma, N., Wennekers, S. & Amoro´s, J. E. (2012). Global Entrepreneurship Monitor 2011 Extended Report: Entrepreneurs and Entrepreneurial Employees Across the Globe. 44 Liddell, A. (2001). When it all turns to custard: Consequences of bankruptcy. Chartered Accountants Journal of New Zealand, 80(9), October, 61; Bankruptcy – Removing the stigma. Credit Management, December 2003, 11; Lai, D. (2002). Going for broke. Australian CPA, 72(7), August, 34; Mehring, J. (ed.). (2004). No shame in bankruptcy? Business Week, 28 June, 36; Whettingsteel, H. & Muktarsingh, N. (2002). Freedom to fail. Director, 56(2), September, 62; Athreya, K. (2004). Shame as it ever was: Stigma and personal bankruptcy. Economic Quarterly – Federal Reserve Bank of Richmond, 90(2), Spring, 1. 45 Shepherd, D. A. (2003). Learning from business failure: Propositions of grief recovery for the self-employed. Academy of Management Review, 28(2), 318–28. 46 Knott, A. M. & Posen, H. E. (2005). Is failure good? Strategic Management Journal, 26, 617–41. 47 Olivier, J. G. J., Janssens-Maenhout, G., Peters, J. A. H. W. & Wilson, J. (2011). Long-term trend in global CO2 emissions. 2011 report. The Hague: PBL/JRC. 48 See Stern, N. (2007). The economics of climate change: The Stern review. Cabinet Office HM Treasury, Cambridge University Press; Levy, D. L. (1997). Business and international environmental treaties: Ozone depletion and climate change. California Management Review, 39(3), 54–71. 49 UN Framework Convention on Climate Change. Lima call for climate action (Advance unedited version), https://unfccc.int/files/meetings/ lima_dec_2014/application/pdf/

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auv_cop20_lima_call_for_climate_ action.pdf. 50 Stern, p. 514. 51 United Nations Framework Convention on Climate Change (2014). Kyoto Protocol, http://unfccc.int/ kyoto_protocol/items/2830.php.

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52 Heede, R. (2014). Tracing anthropogenic carbon dioxide and methane emissions to fossil fuel and cement producers, 1854–2010. Climatic Change, 122: 229–41, DOI 10.1007/ s10584-013-0986-y. 53 Green, F. (2014). China, Australia and the future of climate change. The

Australian, China Spectator, 19 December, http://www.businessspectator. com.au/article/2014/12/19/china/chinaaustralia-and-future-climate-change. 54 Green, F. (2014). China, Australia and the future of climate change.

» CHAPTER FOURTEEN SOURCES OF CAPITAL FOR ENTREPRENEURIAL VENTURES CHAPTER OBJECTIVES

1

To be able to distinguish the five forms of entrepreneurial capital

2 To consider how to attract financing from your family and how to bootstrap a business 3 To identify how informal investors differ from other parts of the funding community 4 To differentiate between debt and equity as methods of financing 5 To examine commercial loans, social lending and public stock offerings as sources of capital

Money is like a sixth sense without which you cannot make a complete use of the other five. W. Somerset Maugham, Of Human Bondage He taonga no te whenua me hoki ano ki te whenua. What is given by the land should return to the land. ori proverb Ma

6 To understand the stages of venture investing 7 To study the market for venture capital and to review venture capitalists’ evaluation criteria for new ventures 8 To discuss the importance of evaluating venture capitalists for a ‘best fit’ selection 9 To discuss private placements as an opportunity for equity capital 10 To examine the business angel market 11 To describe new forms of entrepreneurial capital beyond financial capital 12 To be familiar with Islamic finance and micro-credit 13 To understand the criteria used by impact investors 14 To appreciate the need for raising natural capital as part of an entrepreneurial venture Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

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THE TIMES, THEY ARE A-CHANGIN’ There was a time when an entrepreneur with a bright idea could just walk into a venture capitalist’s office in Silicon Valley or Shanghai and get a heap of money to develop that idea. The venture capitalist (VC) would take a slice of the company and the entrepreneur would take the money and make something of it – or not. Now those days are gone. However, like all change, this situation has created its own opportunity, one that can benefit both the funding community and the start-up venturer. Funding in the new era will not simply be thrown at companies in the hope that one in 10 is wildly successful. Today, funding goes only to entrepreneurs who thoroughly understand their customers’ requirements and who can assure the funder from the beginning that every product delivers on its value. Today, entrepreneurs are still flooding to knowledge clusters around the world. They have similar pedigrees and the same fantastic depth and business acumen, but their attitudes differ. They are willing to live in cramped apartments and work day and night. These guys and gals are happy with $10 000 in funding from individuals rather than $10 million from VC firms. Meanwhile, they are building the same innovative and world-changing products as their earlier colleagues. In this chapter, we examine the sources of capital available to new ventures, with some insights into the approach required of the entrepreneur. We focus on financial capital, but we also make mention of other forms of capital that can be used in creating a new venture. We do not neglect alternative forms of finance such as micro-credit and Islamic banking. We return at the end to a discussion of the relationship of natural capital to entrepreneurial activity.

WHAT ARE THE FORMS OF ENTREPRENEURIAL CAPITAL? While this chapter covers financial capital, it is important first to note that there are other forms of entrepreneurial capital. Natural and social capital are our modern equivalents to the classical ‘industrial infrastructural capital’, which drove nineteenth- and twentieth-century entrepreneurship. At its base, capital is any resource (human-made or natural) that is used to create other goods or services.1 We call them all factors of production, or simply the ‘Five Capitals’.2 These are the types of sustainable capital from which we derive the goods and services we need to improve the quality of our lives (see Figure 14.1). They come from the three ‘spheres’ we mentioned in Chapter 3, pages 88 and 90 (econosphere, sociosphere and biosphere). Let’s look at them: FIGURE 14.1 THE ‘FIVE CAPITALS’ MODEL

Manufactured Capital Economic Capital Financial Capital Social Capital

Econosphere

Human Capital

Sociosphere

Natural Capital Biosphere Source: Adapted from Forum for the Future, http://www.forumforthefuture.org/project/five-capitals/overview. Copyright ª The Forum for the Future. Used by permission.

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• Economic capital is composed both of financial capital and manufacturing capital. Financial capital, also known as ‘money’, is the core of what entrepreneurs use to leverage other resources in the process of making products and services for the marketplace. This starts off being one’s own cash or sometimes funding from lenders or investors that entrepreneurs use to buy real capital equipment. Financial capital is usually provided with some strings attached. Of course, financial capital can also be obtained by saving and investing the surplus or profit on production. The other form of economic capital is manufactured capital, which is made up of physical goods (ironically known sometimes as ‘the plant’) such as machinery for manufacturing, boats for fishing, computers for telecommunications and so forth. These are the material goods or fixed assets that contribute to production rather than being the output itself. • Human capital incorporates people’s health, knowledge, skills, intellectual outputs, motivation and capacity for relationships. It is the talent that we carry around inside us. This ingenuity or skills is a product of many years of training and upbringing. People trade this talent for money, trust or equity. We call this human resources or labour. Entrepreneurs must protect and enhance this renewable resource of human labour and personal creativity available to them through their employees and personal networks. • Social capital is the value of a person’s network. It is often said that entrepreneurs do not care about ‘know-how’ as much as ‘know-who’. Social capital ‘refers to the collective value of all ‘‘social networks’’ and the inclinations that arise from these networks to do things for each other’.3 Social capital consists of trusting relationships between individuals through families, communities, businesses, schools and voluntary organisations. Just as a screwdriver (physical capital) or a university education (human capital) can increase productivity, so too can social contacts affect the productivity of individuals and groups. • Natural capital is the stock of natural ecosystems that entrepreneurs use to create goods or services for their markets. Natural capital is different from other forms of capital in that it cannot be reproduced (only destroyed) by human activity.4 Well-managed, natural capital can be indefinitely sustainable; for example, the ocean can provide a constant flow of fish for human consumption. Natural capital can also supply services to the environment such as waste recycling in mangrove swamps, sinks that absorb greenhouse gases, or water supply and erosion control. The stock of natural capital functions interdependently. It requires a whole systems approach to diversity of the system.5 Entrepreneurs must take care: (1) not to exceed the Earth’s carrying capacity to disperse, absorb, recycle or otherwise neutralise their harmful effects; and (2) protect (even increase) the Earth’s biological diversity and productivity. Every entrepreneur planning a new venture confronts the dilemma of where to find start-up capital – indeed, what type of capital to use and when. It is important to understand not only the various sources of entrepreneurial capital, but also the expectations and requirements of these sources. Without this understanding, an entrepreneur may be frustrated with attempts to find appropriate start-up capital. We now turn to the best known and perhaps most important form of capital for entrepreneurs: financial capital.

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SOURCES OF FINANCIAL CAPITAL Research has long investigated the various sources of finance preferred by entrepreneurs.6 As illustrated in Figure 14.2, entrepreneurs progress up a ladder of sources of financial capital as their ventures develop. Notice that the level of risk and the stage of the firm’s development should determine the appropriate source of financing for the entrepreneurial ventures. FIGURE 14.2 WHO IS FUNDING ENTREPRENEURIAL START-UP COMPANIES?

Financing Continuum The following diagram depicts the typical financing for start-up companies. IPOs Private Placements Banks & Gov’t Programs Venture Capital Seed Capital Angels Family & Friends Owner’s Money

$5M & up

$500K & up

$5K & up

$2–50M

$500K–3M

$100K–2M

$20–250K

$10–100K Source: ‘Successful Angel Investing’, Indiana Venture Center, ª 2008.

HOW TO GET MONEY FROM YOUR FAMILY You may have heard of the ‘elevator pitch’ for raising money from venture capital investors. But have you heard of the ‘kitchen table pitch’? If you are thinking of raising money from someone close to you here are some tips: • Know their motivations. Some relatives and friends are truly into it for the altruism, but like all people your relatives and friends are also into it for the profit motive. When you are making the pitch around the kitchen table, be sure you list what is in it for them. • Debt is better than equity for relatives and friends. Equity is ‘funny money’ to most people unless you intend to on-sell the business quickly. Let’s say your sister invests $10 000 into your restaurant. The restaurant grows and her equity share grows too. However, if you divorce and have to split shares with your ex-husband, or the restaurant simply closes rather than being sold, your sister’s investment is devalued or disappears. • While you will make the pitch face-to-face, do follow up with a written memo. Your relatives do not necessarily care about a formal business plan. But give them some documentation so there is no misunderstanding.7 • Try to treat them as if they were strangers. Get some distance from the transaction. Have a friend present your concept and have a lawyer prepare the promissory note.

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• Try to avoid a repayment schedule. Tie your repayments to your cash flow. Give your relative a percentage of your operating cash flow until you have repaid the whole amount. If nothing else, this gives you a constant reminder of your obligation and is less likely to sour your personal relationships. • Don’t give voting stock. Often a family member or friend will be willing to finance your start-up, but also insists on a voting board seat. One thing you don’t want is your ‘rellies’ looking over your shoulder and second-guessing every decision.8

WAYS TO FIND BOOTSTRAP CAPITAL • Build-out allowances from landlords: Banks will often allow you to count build-out •

•

•

•

•

ENTREPRENEURSHIP allowances as capital in your source and use of funds statement. While the money comes in and goes out, it does increase the overall cash flow and size of your deal. Vertical integration: Capital can often be raised from outside companies with a vested IN PRACTICE interest in developing either distribution channels, or assuring themselves of adequate product flow from cash-starved companies. Example: A distributor invested in his supplier in order to assure himself adequate inventory. Professionals associated with the business: Just present a way for investors to be more profitable in their own companies through the proposed investment. Law firms, advertising agencies, executive recruiters and professional consultants will often accept partial payment in stock, warrants or options in return for services. This is an excellent way to build a powerful team of professionals with a vested interest in your success and your success in raising capital. Many of these professionals are also angel investors, who can champion your cause with other private investors. White knights: If you are a retailer with poor credit and cannot get merchandise shipped without a direct payment, have someone with better credit buy the products and resell them to you. You may pay the white knight a few percentage points each month. If you have a high turnover ratio, it will allow you to re-establish cash flow and credit. Only a few specialists handle these types of operations, but you can find them through factoring companies. Technical or professional expertise: Many professionals are willing to reduce their fees in exchange for equity. Although the services will not be totally free, they are usually reduced by about 50 per cent. You may even be able to arrange options or warrants to avoid initial dilution. Moreover, you can provide the professional an exit strategy prior to an initial public offering if another large investor enters your market. Sell licences or marketing rights: Selling off rights to foreign or geographic markets or private labelling products is an excellent vehicle for young companies. You can use both exclusive and non-exclusive arrangements. All methods should have some type of quota and non-competition clauses. The downside is that later investors may feel that you have sold off too much of the potential, so they will not invest as readily. Sources: Adapted from Venture Planning Associates, ‘28 ways to finance your venture’, http://www.ventureplan.com/ how.to.finance.your.venture.html. See also Laurie Lumenti Garty, ‘Portrait of a modern day bootstrapper’, SVB Accelerator, Silicon Valley Bank, 2012; and Andrew J. Sherman, Raising capital, AMACOM Books, 2012.

STARTING UP WITH ‘INFORMAL INVESTORS’ A lot of the start-up capital for new ventures does not usually come from banks or venture capitalists. It comes from the founders of the businesses and from those we call informal investors, or the 4Fs – friends, family, founders and other ‘foolhardy investors’. To that we could also add neighbours, work colleagues and even strangers. Venture capital is simply not on most companies’ radar – ever. In the home of VC, the USA, for example, less than one in ten thousand companies receives classic venture capital.9 In general, venture capital flows only to companies with superstar

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potential, while informal investment flows to companies in all segments. The truth is that if there were no informal investment there would be virtually no new ventures. In contrast, if there were no venture capital, new ventures by the millions would still be getting off the ground! 4Fs use their own money and carry out their own (sometimes haphazard) due diligence to invest in the entrepreneurial opportunities of other entrepreneurs. The Global Entrepreneurship Monitor (GEM) found that as many as 4 per cent of adults around the world could be counted as informal investors (defined as providing funds for new business – excluding shares and mutual funds).10 The rate varies wildly based on culture and other circumstances. India had an astounding rate of informal investing. Almost 14 per cent of Indians had provided funding to a new business not their own. In China, ask 13 people and you will find an informal investor. Ask 21 New Zealanders and you will find an investor. The wealthier a nation, the higher the average annual amount of money that each informal investor puts into start-up companies. The amount ranges from $308 in the Philippines to $44 000 in the Netherlands. Who are these informal investors? First and foremost, they are: close family relatives of the entrepreneurs (49.4 per cent), friends and neighbours (26.4 per cent), workmates (7.9 per cent), other relatives (9.4 per cent) and strangers (6.9 per cent).11 An Australian survey found that 42 per cent of solo angels commit between $20 000 and $50 000 to each investment and most expect to make two to three investments per year. Thirty per cent of respondents invest less than $20 000 at a time and expect to make only one investment a year. On the other hand, 5 per cent of respondents indicated they invest more than $250 000 a year. It also found that angel investors typically spend 40 hours a month on their angel investing activities such as attending pitches from entrepreneurs, mentoring entrepreneurs prior to investing and undertaking due diligence.12 What financial return do informal investors expect? GEM found that expected returns are affected by altruism. The closer the relationship between an entrepreneur and an investor, the lower the expected return. In putting money into relatives’ and friends’ businesses, more than 50 per cent expected to lose money or at best break even. It confirms a common piece of advice given to entrepreneurs who are seeking informal investments: make sure that your investors, family and friends in particular, can afford to lose all their investment without having to change their lifestyle!13

DEBT VERSUS EQUITY Entrepreneurs need both debt financing and equity financing – all at the right time. Equity financing is best in the early start-up stages, especially during research and development and during product development. The use of debt to finance a new venture involves a payback of the funds plus a fee (interest) for the use of the money (for example, to a bank). Equity financing involves the sale of some of the ownership (shares) in the venture. Debt places a burden of repayment and interest on the entrepreneurs, whereas equity financing forces the entrepreneur to relinquish some degree of control. In the extreme, the hard choice is usually: (1) to take on debt without giving up ownership in the venture, or (2) to relinquish a percentage of ownership in order to avoid having to borrow. In most cases, a combination of debt and equity proves most appropriate. Table 14.1 shows a summary of the differences between equity and debt financing.

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TABLE 14.1

HOW DIFFERENT FINANCE OPTIONS WILL AFFECT PROFITABILITY OR CASH FLOW EQUITY FINANCING

DEBT FINANCING

ADVANTAGES

DISADVANTAGES

ADVANTAGES

DISADVANTAGES

Can provide a large injection of capital

Capital is usually only available in very large amounts

Amount borrowed can vary according to your needs

It creates a debt obligation

No interest payments

It means ‘selling’ a part of your business

As long as it is repaid, it will not affect your ownership of the company

Interest will be charged – affecting profitability

No obligation to repay capital

Venture capitalists expect high returns on their investments (at least 25% p.a.)

Collateral is usually required and banks will value your assets conservatively

Investors may require you to buy them out at a future point

If you borrow from friends or relatives it can sour relations if the business fails

Source: Adapted from MSC Technopreneur Development Flagship, Funding Guide and Directory for the ICT/Multimedia Industry, 1e, May 2002, Multimedia Development Corporation.

DEBT FINANCING Many new ventures find that debt financing is necessary. Short-term borrowing (one year or less) is often required for working capital and is repaid out of the proceeds from sales or other revenue. Long-term debt (term loans of one to five years or long-term loans maturing in more than five years) is used to finance the purchase of property or equipment, with the purchased asset serving as collateral for the loans. Commercial banks are the major source of debt financing for small business.14

COMMERCIAL BANKS Although some banks will make unsecured short-term loans, most bank loans are secured by fixed assets (such as your house), receivables (amount owed to you by customers) and inventories in stock or other assets. Commercial banks also make a large number of intermediate-term loans with maturities of one to five years. In about 90 per cent of these cases, banks require collateral – generally consisting of stocks, machinery, equipment and real estate – and systematic payments over the life of the loan. Whether in Australia or the US, banks are not really interested in your future prospects and do not really look at business plans indicating the viability of businesses and their capacity to meet debt repayments out of cash flow. These days entrepreneurs can actually expect more from a bank than just a loan. Banks increasingly offer several services to a new venture, including payroll, letters of credit, international services, lease financing and money market accounts. Thai banks even offer manufacturing inputs to their entrepreneurs. Asian banks (outside of Singapore) have been slow to expand beyond credit. To secure a bank loan, an entrepreneur typically will have to answer five questions. Five of the most common, together with descriptive commentaries, are: • What do you plan to do with the money? Do not plan to use funds for a high-risk venture. Banks seek the most secure venture possible. • How much do you need? Some entrepreneurs go to their bank with no clear idea of how much money they need. All they know is that they want money. The more precisely the entrepreneur can answer this question, the more likely the loan will be granted.

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• When do you need it? Never rush to the bank with immediate requests for money with no plan. Such a strategy shows that the entrepreneur is a poor planner and most lenders will not want to get involved. • How long will you need it? The shorter the period of time the entrepreneur needs the money, the more likely they are to get the loan. The time at which the loan will be repaid should correspond to some important milestone in the business plan. • How will you repay the loan? This is the most important question. What if plans go awry? Can other income be diverted to pay off the loan? Does collateral exist? Even if a quantity of fixed assets exists, the bank may be unimpressed because it knows from experience that assets sold at a liquidation auction bring only a fraction of their value. Five to 10 cents in the dollar is not unusual.15 Remember that banks are businesses too. They have shareholders to whom they must report and they are highly regulated by federal and state agencies. They may sometimes not lend to certain industries based on their corporate policy. Debt financing has both advantages and disadvantages. On the plus side, you don’t have to give up ownership of your company. More borrowing allows for potentially greater return on equity. And during periods of low interest rates, the opportunity cost is justified since the cost of borrowing is low. On the minus side, you will have regular (monthly) interest payments. Continual cash-flow problems can be intensified because of payback responsibility. Heavy use of debt can inhibit growth and development.

OTHER DEBT-FINANCING SOURCES Banks are not the only source of debt financing. Sometimes a new venturer can obtain long-term financing for a particular piece of equipment from the manufacturer, who will take a portion of the purchase price in the form of a long-term note. Manufacturers are most willing to do this when an active market exists for their used equipment, so if the machines must be repossessed they can be resold. In addition, new ventures sometimes can obtain short-term debt financing by negotiating extended credit terms with suppliers. However, this kind of trade credit restricts the venture’s flexibility with selecting suppliers and may reduce its ability to negotiate supplier prices. Other debt-financing sources include trade credit, accounts receivable factoring, finance companies, leasing companies, mutual savings banks, savings and loan associations and insurance companies. Table 14.2 provides a summary of these sources, the business types they often finance and their financing terms. Trade credit is credit given by suppliers who sell goods on account. This credit is reflected on the entrepreneur’s balance sheet as accounts payable and in most cases it must be paid in 30 to 90 days. Many small, new businesses obtain this credit when no other form of financing is available to them. Suppliers typically offer this credit as a way of attracting new customers. Accounts receivable financing is short-term financing that involves either the pledge of receivables as collateral for a loan or the sale of receivables (factoring). Accounts receivable loans are made by commercial banks, whereas factoring is done primarily by commercial finance companies and factoring concerns.

Chapter 14: Sources of capital for entrepreneurial ventures 505

TABLE 14.2

COMMON DEBT SOURCES BUSINESS TYPE FINANCED

FINANCING TERM

SOURCE

START-UP FIRM

EXISTING FIRM

SHORT TERM

INTERMEDIATE TERM

LONG TERM

Trade credit

Yes

Yes

Yes

No

No

Commercial banks

Sometimes, but only if strong capital or collateral exists

Yes

Frequently

Sometimes

Seldom

Finance companies

Seldom

Yes

Most frequent

Yes

Seldom

Factors

Seldom

Yes

Most frequent

Seldom

No

Hire purchase

Sometimes

Yes

No

Yes

Occasionally

Leasing companies

Seldom

Yes

No

Most frequent

Occasionally

Mutual savings banks and savings-and-loan associations

Seldom

Real estate ventures only

No

No

Real estate ventures only

Insurance companies

Rarely

Yes

No

No

Yes

Accounts receivable bank loans are made on a discounted value of the receivables pledged. A bank may make receivable loans on a notification or non-notification plan. Under the notification plan, purchasers of goods are informed that their accounts have been assigned to the bank. They then make payments directly to the bank, which credits them to the borrower’s account. Under the non-notification plan, borrowers collect their accounts as usual and then pay off the bank loan. Factoring is the sale of a business’s accounts receivable. Under this arrangement the receivables are sold at a discounted value to a factoring company. Some commercial finance companies also do factoring. Under a standard arrangement the factor will buy the client’s receivables outright, without recourse, as soon as the client creates them by shipment of goods to customers. Factoring fits some businesses better than others and it has become almost traditional in industries such as textiles, furniture manufacturing, clothing manufacturing, toys, shoes and plastics. Hire purchase is an extended payment scheme entered into between the entrepreneur/hirer and the owner (equipment manufacturer or financial institution). Under the hire purchase the hirer only needs to pay a small deposit up front and then make regular instalment payments. Only on final instalment does the hirer acquire ownership. Finance companies are asset-based lenders that lend money against assets such as receivables, inventory and equipment. The advantage of dealing with a commercial finance company is that it often will make loans that banks will not. The interest rate varies from 2 to 6 per cent over that charged by a bank. New ventures that are unable to raise money from banks and factors often turn to finance companies.

EQUITY FINANCING Equity financing is money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it. The use of equity funding thus requires no repayment in the form of debt. It does, however, require sharing the ownership and profits with the funding source. Since no repayment is required, equity capital can be much safer for new

506 Part 4: Growth strategies for entrepreneurial ventures

ventures than debt financing. Yet the entrepreneur must consciously decide to give up part of the ownership in return for this funding.16 Other ways to raise cash include equity instruments, which give investors a share of the ownership. Here are some examples. • Loan with warrants provide the investor with the right to buy shares at a fixed price at some future date. Terms on the warrants are negotiable. The warrant customarily provides for the purchase of additional shares, such as up to 10 per cent of the total issue at 130 per cent of the original offering price within a five-year period following the offering date. • Convertible debentures are unsecured loans that can be converted into shares. The conversion price, the interest rate and the provisions of the loan agreement are all areas for negotiation. • Preferred shares are equity that give investors a preferred place among the creditors in the event the venture is dissolved. These shares also pay a dividend and can increase in price, thus giving investors an even greater return. Some preferred share issues are convertible to common shares, a feature that can make them even more attractive. • Common shares are the most basic form of ownership. These shares usually carry the right to vote for the board of directors. If a new venture does well, common-share investors often make a large return on their investment. These share issues often are sold through public or private offerings. Equity capital can be raised through two major sources: public share offerings and private placements. In both cases, entrepreneurs must follow the local laws pertaining to raising such funds. The entire process can be difficult, expensive and time-consuming. On the other hand, successful share offerings can help a fledgling enterprise raise a great deal of money. The smart entrepreneur will keep an eye on dual or triple-tracking the firm. That means simultaneously preparing for an initial public offering, a trade sale or venture capital/private-equity round, depending on the balance of advantage.

PUBLIC OFFERINGS Going Public? On CourseMate Express read about the complete IPO process from NASDAQ.

During the last decade, many new ventures have sought capital through the public markets. The term initial public offering (IPO) is used to represent the registered public offering of a company’s securities for the first time. Going public is a term used to refer to a corporation raising capital through the sale of securities on the public markets. This is a company’s first-ever sale of shares to the public. In many cases it is the first time people outside the company have the opportunity to buy its shares. That is why a company often is said to be ‘going public’ or ‘floating’ when it conducts an initial public offering. Here are some of the advantages to this approach. • Size of capital amount: Selling securities is one of the fastest ways to raise large sums of capital in a short period. • Liquidity: The public market provides liquidity for owners since they can readily sell their shares. • Value: The marketplace puts a value on the company’s shares, which in turn allows value to be placed on the corporation. • Image: The image of a publicly traded corporation often is stronger in the eyes of suppliers, financiers and customers. There has been tremendous volatility within the market over the years and entrepreneurs should be aware of the concerns that confront them when they pursue an IPO. In addition, many new ventures have begun to recognise some other disadvantages of going public. Several of these are outlined below.

Chapter 14: Sources of capital for entrepreneurial ventures 507

• Costs: The expenses involved with a public offering are significantly higher than for other sources of capital. Accounting fees, legal fees and prospectus printing and distribution, as well as the cost of underwriting the shares, can result in high costs. • Disclosure: Detailed disclosures of the company’s affairs must be made public. New-venture firms often prefer to keep such information private. • Requirements: The paperwork involved with government regulations, as well as continuing performance information, drains large amounts of time, energy and money from management. Many new ventures consider these elements better invested in helping the company grow. • Shareholder pressure: Management decisions are sometimes short term in nature in order to maintain a good performance record for earnings and dividends to the shareholders. This pressure can lead to a failure to consider the company’s long-term growth and improvement. The advantages and disadvantages of going public must be weighed carefully. If the decision is to undertake a public offering, then it is important the entrepreneur understand the process involved.

PRIVATE PLACEMENTS Private placement is money invested in a company usually from private investors in the form of shares or sometimes bonds. It is sometimes possible to avoid issuing a prospectus, but rules will differ from country to country. In most cases, a placement agent (usually a share-broking firm or investment bank) will manage the process for a fee. The ideal small-business candidate for private placement is a company looking for growth or expansion funding. A private placement is suitable when you need an injection of capital to jump to the next level of growth and you have a proven track record of profitability. A private placement memorandum (PPM) is the document that discloses everything the investors need to know to make an informed investment decision about the direct public offering (DPO) being considered. This includes: • the offering structure • the share structure of the company • disclosures about the securities being purchased • company information • information on company operations • risks involved with the investment • management information • use of proceeds • information on certain transactions that could affect the investor and investor suitability data.17

THE VENTURE CAPITAL MARKET Venture capitalists are a valuable and powerful source of equity funding for some (a small minority of) new ventures. These experienced professionals provide a full range of financial services for new or growing ventures, including the following: • capital for start-ups and expansion • market research and strategy for businesses that do not have their own marketing departments

508 Part 4: Growth strategies for entrepreneurial ventures

• • • • • • • •

• •

•

•

management-consulting functions and management audit and evaluation contacts with prospective customers, suppliers and other important businesspeople assistance in negotiating technical agreements help in establishing management and accounting controls help in employee recruitment and development of employee agreements help in risk management and the establishment of an effective insurance program counselling and guidance in complying with a myriad of government regulations. Here are the different stages of venture investing (see Figure 14.3): Seed financing provides the initial funds for a business concept to be developed. This may involve additional research, product development and initial marketing to reach out to early-adopter customers. The companies receiving funding at this stage may be in the process of just being incorporated or may have been in operation for a while. Start-up financing is where product development is completed and the market is trial-tested. Sales are still low and the company needs one year or less of expense money. Early stage financing is provided to companies that have completed the product development stage and test marketing as well, but require additional financing to expand commercial manufacturing and sales. Expansion financing is provided when the start-up company is poised to grow rapidly. The business is viable and is reaching break-even point. The funds may be used to increase production capacity, market or product development and/or provide additional working capital. Late-stage funding refers to the pre-initial public offering investments in a company for strengthening the positioning of the company and gaining endorsements from the top venture capital firms as the company prepares for its listing.

FIGURE 14.3 FUNDING STAGES

Bootstrapping Entrepreneur uses own money and creative means

Seed financing Capital for product development and research

Start-up Completing product development and first year expenses

Early stage financing Initial capital is gone and now need full-scale manufacturing and sales

Expansion financing Capital to expand product to broader markets

Chapter 14: Sources of capital for entrepreneurial ventures 509

VENTURE CAPITAL IN THE NEW ERA A number of major trends have occurred in venture capital over the last few years. First, innovation has become more global and is no longer the exclusive domain of the Americans. Therefore, many VCs have opened offices in Eastern Europe, China, India, Israel, and Vietnam, to name a few.18 Second, funds are becoming more specialised and less homogeneous. The industry has become more diverse, more specialised and less uniform than is generally thought. Sharp differences are apparent in terms of investing objectives and criteria, strategy and focusing on particular stages, sizes and market technology niches. Some of the tech sectors that have funds focused exclusively on them are life sciences, biotech, cleantech and digital media.19 Third, small start-up investments have weakened over the last decade. VC funds typically lack professionals who have experience with start-ups and first-stage ventures. Consequently, the level of seed and start-up financing is much lower in comparison to the financing available for early stages, expansion and acquisition.20 Fourth, the industry has become more efficient and more responsive to the needs of the entrepreneur as a result of greater professionalism and greater competition. Now most VCs view themselves as service providers whose job is to provide advice and counsel, which adds more value to the enterprise than just cash. Many VCs today were successful entrepreneurs themselves and can therefore relate to the challenges faced by entrepreneurs and can help with strategies to finance and build a successful enterprise. Entrepreneurs should look for a VC that not only is a source of capital but also has deep industry knowledge and a broad network.21 Fifth, the heated competition for venture capital in recent years has resulted in a more sophisticated legal and contractual environment. The frequency and extent of litigation are rising. As an example, the final document governing the investor/entrepreneur relationship – called the investment agreement – can be several centimetres thick and can comprise two volumes. In this regard, legal experts recommend that the following provisions be carefully considered in the investment agreement: choice of securities (preferred stock, common stock, convertible debt and so forth), control issues (who maintains voting power), evaluation issues and financial covenants (ability to proceed with mergers and acquisitions), and remedies for breach of contract (rescission of the contract or monetary damages).22

DISPELLING VENTURE CAPITAL MYTHS Because many people have mistaken ideas about the role and function of VCs, a number of myths have sprung up about them. Some of these, along with their rebuttals, follow. • Myth 1: Venture capital firms want to own control of your company and tell you how to run the business. No venture capital firm intentionally sets out to own control of a small business. VCs have no desire to run the business. They do not want to tell entrepreneurs how to make day-to-day decisions and have the owner report to them daily. They want the entrepreneur and the management team to run the company profitably. They do want to be consulted on any major decision, but they want no say in daily business operations.23 • Myth 2: Venture capitalists are satisfied with a reasonable return on investments. VCs expect very high, exorbitant, unreasonable returns. They can obtain reasonable returns from hundreds of publicly traded companies. They can obtain reasonable returns from many types of investments that do not have the degree of risk involved in financing a small

510 Part 4: Growth strategies for entrepreneurial ventures

business. Because every venture capital investment involves a high degree of risk, it must have a correspondingly high return on investment.24 • Myth 3: Venture capitalists are quick to invest. It takes a long time to raise venture capital. On the average, it will take six to eight weeks from the initial contact to raise venture capital. If the entrepreneur has a well-prepared business plan, the investor will be able to raise money in that timeframe. A VC will see from 50 to 100 proposals a month; of that number, ten will be of some interest. Of those, two or three will receive a fair amount of analysis, negotiation and investigation. Of the two or three, just one may be funded. This funnelling process of selecting one out of a hundred takes a great deal of time. Once the venture capitalist has found that one, he or she will spend a significant amount of time investigating possible outcomes before funding it. • Myth 4: Venture capitalists are interested in backing new ideas or high-technology inventions – management is a secondary consideration. VCs back only good management. If an entrepreneur has a bright idea but a poor managerial background and no experience in the industry, the individual should try to find someone in the industry to bring onto the team. The VC will have a hard time believing that an entrepreneur with no experience in that industry and no managerial ability in his or her background can follow through on a business plan. A good idea is important, but a good management team is even more important.25 • Myth 5: Venture capitalists need only basic summary information before they make an investment. A detailed and well-organised business plan is the only way to gain a venture capital investor’s attention and obtain funding. Every VC, before becoming involved, wants the entrepreneur to have thought out the entire business plan and to have written it down in detail.26

VENTURE CAPITALISTS’ DUE DILIGENCE ‘DEAL KILLERS’

ENTREPRENEURSHIP IN PRACTICE

When venture capitalists examine a business plan and then conduct their own due diligence on a proposed venture, certain areas stand out immediately as negative. These are referred to as ‘deal killers,’ because it is sometime impossible to get a deal done if any one of these items is identified.

An arrogant management team. This is a team that will not listen, or one that has displayed a lack of integrity or is preoccupied with complete control. • No defendable market position. This occurs when there is no identified intellectual property to defend or any specific market niche to occupy. Excessive founder salaries. If the focus seems to be on the founders’ distributing the proceeds to themselves quickly (or bonuses), then there is problem of commitment to the venture. Vulnerability of the founder. Whenever there is overdependence on one person (in particular a founder) for his or her skills or persona, there could be a major issue. Yesterday’s news. If a business plan is perceived as ‘overshopped’ or simply presented too often over a short period of time, then it may be perceived as an ‘old idea.’ Ignorance of the competitive landscape. Whenever the team lacks the understanding of the real strengths and weaknesses of the competition, a major red flag goes up for the VC. Unrealistic expectations. A typical problem of entrepreneurs is their lack of understanding of the valuation of their venture and the deal terms involved in the VC investment proposal. Usually the entrepreneurs think that their venture is worth far more than the VC does. •

• • • • •

Source: Adapted from Andrew J. Sherman, Raising Capital, 3rd edn. New York: AMACOM Books, 2012, p. 196.

Chapter 14: Sources of capital for entrepreneurial ventures 511

VENTURE CAPITALISTS’ OBJECTIVES Venture capitalists have different objectives from other capital lenders. They are interested in security and payback. As part owners of the companies they invest in, venture capitalists are most concerned with return on investment (ROI). As a result they put a great deal of time into weighing the risk of a venture against the potential return. They carefully measure both the product/service and the management. The best advice is to delay outside investment as long as possible and to build as much value as you can into your business before you seek it, because venture capitalists are interested in making a large ROI. Table 14.3 provides some commonly sought targets. Of course, these targets are flexible. They would be reduced, for example, in cases where a company has a strong market potential, is able to generate good cash flow, or the management has invested a sizable portion of its own funds in the venture. However, an annual goal of 20 to 30 per cent ROI would not be considered too high, regardless of the risks involved.27 TABLE 14.3

RETURNS ON INVESTMENT TYPICALLY SOUGHT BY VENTURE CAPITALISTS

STAGE OF BUSINESS

EXPECTED ANNUAL RETURN ON INVESTMENT

EXPECTED INCREASE ON INITIAL INVESTMENT

Start-up business (idea stage)

60% þ

10–15 3 investment

First-stage financing (new business)

40%–60%

6–12 3 investment

Second-stage financing (development stage)

30%–50%

4–8 3 investment

Third-stage financing (expansion stage)

25%–40%

3–6 3 investment

Turnaround situation (rescuing an apparently failing business)

50% þ

8–15 3 investment

Source: Adapted from W. Keith Schilit, ‘How to obtain venture capital’, Business Horizons (May/June 1987), p. 78. Copyright ª 1987 by the Foundation for the School of Business at Indiana University. Reprinted by permission; and interviews with Silicon Valley Venture Capitalists by Professor Kuratko in March 2012.

CRITERIA FOR EVALUATING NEW-VENTURE PROPOSALS In addition to the evaluation of product ideas and management strength, numerous criteria are used to evaluate new-venture proposals. Shepherd developed a list of eight critical factors that VCs use in the evaluation of new ventures, as follows: 1 Timing of entry 2 Key success factor stability 3 Educational capability 4 Lead time 5 Competitive rivalry 6 Entry wedge imitation 7 Scope 8 Industry-related competence.28 Each factor was defined from the high/low perspective (see Table 14.4 for definitions). Obviously, the business plan is a critical element in a new-venture proposal and should be complete, clear and well presented. Venture capitalists will generally analyse five major aspects of the plan: (1) the proposal size, (2) financial projections, (3) investment recovery, (4) competitive advantage and (5) company management.

Sample term sheet. On CourseMate Express use this as a model agreement for financing your start-up company.

512 Part 4: Growth strategies for entrepreneurial ventures

TABLE 14.4

FACTORS IN VENTURE CAPITALISTS’ EVALUATION PROCESS

ATTRIBUTE

LEVEL

DEFINITION

Timing of entry

Pioneer

Enters a new industry first

Late follower

Enters an industry late in the industry’s stage of development

High

Requirements necessary for success will not change radically during industry development

Low

Requirements necessary for success will change radically during industry development

High

Considerable resources and skills available to overcome market ignorance through education

Low

Few resources or skills available to overcome market ignorance through education

Long

An extended period of monopoly for the first entrant prior to competitors entering the industry

Short

A minimal period of monopoly for the first entrant prior to competitors entering this industry

High

Intense competition among industry members during industry development

Low

Little competition among industry members during industry development

High

Considerable imitation of the mechanisms used by other firms to enter this, or any other, industry – for example, a franchisee

Low

Minimal imitation of the mechanisms used by other firms to enter this, or any other, industry – for example, introducing a new product

Broad

A firm that spreads its resources across a wide spectrum of the market – for example, many segments of the market

Narrow

A firm that concentrates on intensively exploiting a small segment of the market – for example, targeting a niche

High

Venturer has considerable experience and knowledge with the industry being entered or a related industry

Low

Venturer has minimal experience and knowledge with the industry being entered or a related industry

Key success factor stability

Educational capability

Lead time

Competitive rivalry

Entry wedge mimicry

Scope

Industry-related competence

Source: Dean A. Shepherd, ‘Venture capitalists’ introspection: A comparison of ‘‘in use’’ and ‘‘espoused’’ decision policies’, Journal of Small Business Management (April 1999), 76–87; and ‘Venture capitalists’ assessment of new venture survival’, Management Science (May 1999), 621–32. Reprinted by permission. Copyright ª 1999 by the Institute for Operation Research and the Management Sciences (INFORMS). Reprinted by permission.

The evaluation process typically takes place in stages. The four most common stages are: • Stage 1: Initial screening – a quick review of the basic venture to see if it meets the venture capitalist’s particular interests. • Stage 2: Evaluation of the business plan – a detailed reading of the plan is done in order to evaluate the factors mentioned earlier.

Chapter 14: Sources of capital for entrepreneurial ventures 513

• Stage 3: Oral presentation – the entrepreneur verbally presents the plan to the venture capitalist. • Stage 4: Final evaluation – after analysing the plan and visiting suppliers, customers, consultants and others, the venture capitalist makes a final decision. This four-step process screens out approximately 98 per cent of all venture plans. The rest receive some degree of financial backing.

Evaluating the venture capitalist The venture capitalist will evaluate you and so you should not hesitate to evaluate them. Does the venture capitalist understand the proposal? Is the individual familiar with the business? Is the person someone with whom you can work? If the answers reveal a poor fit, look for a different venture capitalist. Venture capitalists do add value to an entrepreneurial firm beyond the money they supply, especially in high-innovation ventures. Because of this finding, you need to choose the appropriate venture capitalist at the outset and, most importantly, they must keep the communication channels open as the business grows.29 On the other hand it is important to realise that you may have a limited choice of a venture capitalist. Funds tend to be controlled by fewer groups and the quality of the venture must be promising. In addition, the trend towards concentration of venture capital under the control of a few firms is increasing.30 That means you shouldn’t be deterred from evaluating prospective venture capitalists. The Entrepreneurship in Practice’ box ‘Asking venture capitalists the right questions’ provides a list of important questions that a prospective venture capital firm should answer. Evaluating and even negotiating with the VC are critical to establishing the best equity funding. You may worry that if you rock the boat by demanding too much, the venture capital firm will lose interest. That’s an understandable attitude; venture capital is hard to get and if you’ve gotten as far as the negotiating process, you’re already among the lucky few. Table 14.5 lists some useful venture capital resources. But that doesn’t mean you have to roll over and play dead. A venture capital investment is a business deal that you may have to live with for a long time. Although you’ll have to give ground on many issues when you come to the bargaining table, there is always a point beyond which the deal no longer makes sense for you. You must draw a line and fight for the points that really count.31

ASKING VENTURE CAPITALISTS THE RIGHT QUESTIONS There are a number of important questions that entrepreneurs should ask of venture capitalists. Following are seven of the most important. • •

Does the venture capital firm in fact invest in your industry? How many deals has the firm actually done in your field? What is it like to work with this venture capital firm?

ENTREPRENEURSHIP IN PRACTICE

Get references. (An unscreened list of referrals, including from CEOs of companies that the firm has been successful with as well as those it has not, can be very helpful.) • •

What experience does the partner doing your deal have and what is their clout within the firm? Check out the experiences of other entrepreneurs. How much time will the partner spend with your company if you run into trouble?

A seed-stage company should ask, ‘You guys are a big fund and you say you can seed me a quarter of a million dollars. How often will you be able to see me?’ The answer should be at least once a week.

cont.

»

514 Part 4: Growth strategies for entrepreneurial ventures cont.

How healthy is the venture capital fund and how much has been invested? A venture firm with a lot of troubled investments will not have much time to spare. If most of the fund is invested there may not be much money available for your follow-on rounds. • •

Are the investment goals of the venture capitalists consistent with your own? Have the venture firm and the partner championing your deal been through any economic downturns? A good venture capitalist won’t panic when things get bad. Source: Reprinted from Juilland, M-J. (1987), ‘What do you want from a venture capitalist?’ Venture, August, for Entrepreneurial Business Owners & Investors. Copyright ª 1987 Venture Magazine, Inc

TABLE 14.5

VENTURE CAPITAL INTERNET RESOURCES

Australian Venture Capital Association

http://www.avcal.com.au

Global Entrepreneurship Monitor Financial Reports

http://www.gemconsortium.org

Hong Kong Venture Capital Association Ltd

http://www.hkvca.com.hk

Indian Private Equity and Venture Capital Association

http://www.indiavca.org

Korean Venture Capital Association

http://www.kvca.or.kr

Malaysia Venture Capital and Private Equity Association

http://www.mvca.org.my

New Zealand Private Equity and Venture Capital Association

http://www.nzvca.co.nz

Philippine Venture Capital Investment Group

http://www.philvencap.com

Singapore Venture Capital and Private Equity Association

http://www.svca.org.sg

Taiwan Venture Capital Association

http://www.tvca.org.tw

Thai Venture Capital Association

http://www.venturecapital.or.th

ANGEL FINANCING What are angels joining angel organisations? Why the proliferation of angel networks? Learn all about it on CourseMate Express.

Many wealthy people are looking for investment opportunities. They are referred to as business angels or informal risk capitalists. Here we distinguish business angels from the 4F informal investors – friends, family, founders and other ‘foolhardy’ investors – which we looked at earlier. Business angels tend not to have any previous relationship with the entrepreneur and take a more objective approach to determining whether to invest. Angel investors range from those taking a passive approach (backing others’ judgements) through to hands-on investors providing advice or direct management input to help the business become established. In many cases, the latter group of angel investors will take as rigorous an approach to their investing as some venture capitalists. A key difference between angel and venture investors is that angels tend to invest as individuals (often as part of a group) operating part-time, whereas venture capital generally comes via a company or fund with full-time managers and a board of directors, using formal analysis and investment procedures (see Figure 14.4).

Chapter 14: Sources of capital for entrepreneurial ventures 515

Idea development

Seed

Start-up

Early and late expansion

Founders and family

Friends

Business angels

Venture capitalists

High risk Intuitive, emotional Informal Individual/independent

Lower (but still high) risk Rigorous Formal Syndicated/pooled

How do informal investors find projects? Research studies indicate that they use a network of friends. Additionally, many localities are formulating venture capital networks, which attempt to link business angels with entrepreneurs and their new or growing ventures.

TYPES OF ANGEL INVESTORS Angel investors can be classified into five basic groups: • Corporate angels: Typically, so-called corporate angels are senior managers who have been laid off with generous severances or have taken early retirement. In addition to receiving the cash, an entrepreneur may persuade the corporate angel to occupy some senior management position, such as in business development. • Entrepreneurial angels: The most prevalent type of investors, most of these individuals own and operate highly successful businesses. Because these investors have other sources of income and perhaps significant wealth from initial public offerings or partial buyouts, they will take bigger risks and invest more capital. The best way to market your deal to these angels, therefore, is as a synergistic opportunity. Reflecting this orientation, entrepreneurial angels seldom look at companies outside of their own area of expertise and will participate in no more than a handful of investments at any one time. These investors usually take a seat on the board of directors, but rarely assume management duties. They will make fair-sized investments and invest more as the company progresses. • Enthusiast angels: Whereas entrepreneurial angels tend to be somewhat calculating, enthusiasts simply like to be involved in deals. Most enthusiast angels are aged 65 or older, are independently wealthy from success in a business they started and have abbreviated work schedules. For them investing is a hobby. As a result they typically play no role in management and rarely seek to be placed on a board. Because they spread themselves across so many companies the size of their investments tend to be small. • Micro-management angels: Micro-managers are very serious investors. Some of them were born wealthy, but the majority attained wealth through their own efforts. Unfortunately, this heritage makes them dangerous. Because most have successfully built a company, micro-managers attempt to impose the tactics that worked for them on their portfolio

FIGURE 14.4 WHERE ANGELS FIT IN THE MIX

516 Part 4: Growth strategies for entrepreneurial ventures

companies. Although they do not seek an active management role, micro-managers usually demand a seat on the board of directors. If business is not going well they will try to bring in new managers. • Professional angels: The term ‘professional’ in this context refers to the investor’s occupation, such as doctor, lawyer and, in rare instances, accountant. Professional angels like to invest in companies that offer a product or service with which they have some experience. They rarely seek a board seat, but they can be unpleasant to deal with when the going gets rough and may believe that a company is in trouble before it actually is. Professional angels will invest in several companies at one time.32 TABLE 14.6

MAIN DIFFERENCES BETWEEN BUSINESS ANGELS AND VENTURE CAPITALISTS

MAIN DIFFERENCES

BUSINESS ANGELS

VENTURE CAPITALISTS

Personal

Entrepreneurs

Investors

Firms funded

Small, early-stage

Large, mature

Due diligence done

Minimal

Extensive

Location of investment

Of concern

Not important

Contract used

Simple

Comprehensive

Monitoring after investment

Active, hands-on

Strategic

Exiting the firm

Of lesser concern

Highly important

Rate of return

Of lesser concern

Highly important

Source: M. Osnabrugge & R. Robinson, Angel investing: Matching startup funds with startup companies (San Francisco, CA: Jossey-Bass, 2000), 111. Copyright ª John Wiley & Sons. Used by permission.

Another important consideration for angel capital is that a larger percentage of their investing is devoted to seed a start-up business as opposed to venture capital. The median size of an informal investment is $700 000 (USA), which indicates the importance of informal risk capital to entrepreneurs seeking smaller amounts of start-up financing.33 (See Table 14.7 for some ‘angel stats.’) Obviously, informal networks are a major potential capital source for entrepreneurs. TABLE 14.7

ANGEL STATS (USA)

Typical deal size

$500 000–$850 000

Typical recipient

Start-up firms

Cash-out time frame

Five to seven years

Expected return

35% to 50% a year

Ownership stake

Less than 50% Source: Jeffrey Sohl, University of New Hampshire’s Center for Venture Research, 2011; and the Halo Report, 2011, http://angelresource.org/en/Research/Halo-Report/Halo-Report.aspx

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However, every entrepreneur should be careful and thorough in his or her approach to business angels – there are advantages and disadvantages associated with angel financing. Table 14.8 outlines some of the critical pros and cons of dealing with business angels. Only through recognition of these issues will entrepreneurs be able to establish the best relationship with a business angel. TABLE 14.8

PROS AND CONS OF DEALING WITH ANGEL INVESTORS

PROS: 1 Angels engage in smaller financial deals. 2 Angels prefer seed stage or start-up stage. 3 Angels invest in various industry sectors. 4 Angels are located in local geographic areas. 5 Angels are genuinely interested in the entrepreneur. CONS: 1 Angels offer no additional investment money. 2 Angels cannot offer any national image. 3 Angels lack important contacts for future leverage. 4 Angels may want some decision making with the entrepreneur. 5 Angels are getting more sophisticated in their investment decisions.

NEW FORMS OF ENTREPRENEURIAL CAPITAL Most entrepreneurship textbooks stop here in their discussions about capital needs. For them, entrepreneurial capital is simply financial capital. As entrepreneurs move into the new millennium, however, it is important to realise that there is more to capital-raising than venture capital or bank loans. Yes, there are the creative sides of bootstrapping and the 4Fs, but there are also new modalities of funding that are emerging in our fast-changing world. Here we cover some amazing topics from Islamic finance and social lending to micro-credit and natural capital. They are all part of the mix of entrepreneurial capital. (See also the note on the history of Islamic entrepreneurship in Chapter 1, page 12.)

ISLAMIC FINANCE About one in four people in the world is Muslim and the study of Muslim entrepreneurship has deepened our knowledge about the cultural aspects of our field.34 Engaging in entrepreneurial endeavours is encouraged and even demanded in the teachings of Islam. Muslim entrepreneurs perceive themselves to be committed Muslims who consider entrepreneurship a religious and economic duty intended to generate halal (lawful) income to meet their financial obligations and to contribute to the falah (wellbeing) of the Muslim ummah (nation) in this life and hereafter.35 Muslims are taking advantage of a form of ethical investment with ancient roots, but greatly accelerated in the past 20 years in places such as Malaysia and Dubai. Muslims point to a long history of innovation, from arithmetic and chemistry to coffee to the fountain pen,36 made possible by a culture that encouraged learning, research and invention.

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The religion of Islam was revealed to mankind through the merchant Mohammed ibn Abdullah. In fact, the Koran’s passages are often written using business and trade metaphors. Life is likened to a business venture, where one earns profits to gain entry into heaven – profits meaning faith and good deeds to others.37 Unlike some religions, Islam urges individuals to strive to earn monetary rewards and spiritual profits, and today Islamic entrepreneurs and merchants operate in all modern economic sectors. The overwhelming majority are family-owned small and medium-sized enterprises (SMEs). Business is a normal part of Muslim life. Business is so ever-present that pilgrims are allowed to transact business during their pilgrimage to Mecca. Islam is indeed a wealth-creating society. A strict moral business code left many Islamic banks unscathed by the global financial crisis (GFC). While complex derivative products left Western banks reeling from exposure to toxic assets, in contrast the more risk-averse Islamic finance system did not embrace this kind of deal.38 When it comes to new-venture financing we should not be surprised that Muslim entrepreneurs, for example, in Malaysia and Indonesia, do it differently.39 Islamic entrepreneurs have very tight strictures on what they may and may not transact as business. Islamic finance is based on Islamic law, or sharia, which emphasises justice and partnership. While entrepreneurs in the West might feel themselves free to separate business and religion, Islamic entrepreneurs seek to fulfil all transactions with religious goals. In the world of entrepreneurial finance, this means that speculation (gharar) is forbidden as is the charging of interest (riba). It is well known that Islam forbids consumption, production and marketing of pork and alcohol. Muslims are also banned from gambling, prostitution and usury. They also may not engage in dishonesty, fraud, deception or do anything that injures another. This rules out such modern-day business practices as hoarding, speculation, collusion, options and futures, day trading and commercial insurance. These are called haram, or ‘forbidden’ activities. Halal is an Arabic word that means ‘permissible’ and halal finance refers to types of banking and investing that are consistent with Islamic law. The central concept that unites all of this is justice. Transactions that could be unjust for either the borrower or the lender are discouraged. In addition, for any financial undertaking, risks must be shared. In essence it is similar to the Western concepts of ethical or green investing. These constraints affect Islamic financial assets (Sakk in singular, Sukuk in plural) and insurance products (Takaful), dictating their structures in accordance with Muslim law and ethics. In the end, Muslim entrepreneurs are no different from any other entrepreneurs in their desire to expand their business and increase their profit.

Islamic financial terminology Sukuk are financial instruments designed to help both investors and entrepreneurs come to grips with these proscriptions and avoid interest and speculative risk.40 What Sukuk do is to securitise assets – packaged equity interests owned by a pool of investors who share the rents or profits. Let us say you want to buy some capital equipment. In the West a conventional bond is a promise to repay a loan, but under Islam this can be a variety of deals. Islamic banks often lend money to companies with floating interest rates pegged to the company’s performance. Alternatively, an agreement is made so that you will provide labour and the bank will provide financing, so that both profit and risk are shared. Such participatory arrangements between capital and labour reflect the Islamic view that you do not have to bear all the risk/cost of a failure.41 Here are five of those instruments.42 • Murabaha (Murabaha means ‘profit’): The Murabaha plan is a cost-plus sale. The bank buys your machinery and then immediately sells it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. So the

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bank might buy a property that costs $200 000 and sell it on to a customer for $250 000; the customer then pays that sum back over a fixed term. Murabaha essentially is undertaking a trade with a mark-up and is used for short-term financing, similar in form to purchase finance. • Ijara (Ijara means ‘lease’): The Ijara plan is basically a lease-to-own plan. The bank purchases the property you want then leases it out to you. At the end of the term, the bank transfers ownership of the property to you. The bank would bear all the risk and a portion of the instalment payment goes towards the final purchase of the asset at the time of transfer of asset. • Musharaka (Musharaka means ‘sharing’ or ‘partnership’): Musharaka is similar to venture capital. Under a Musharaka plan, you buy the machinery jointly and gradually buy the bank out of it. So if you put down 10 per cent of the purchase price, the bank will buy the remaining 90 per cent. You pay the bank monthly rent on the share you do not own as well as buying more shares in the property with each monthly payment with a view to owning the property outright at the end of the term. The cost of a share is based on the property’s original cost price, not its present market value.43 • Bai’ al ’inah (sale and buy-back agreement): Bai’ al ’inah is a financing facility with the underlying buy and sell transactions between the financier and the customer. The financier buys an asset from the customer. That asset is then sold to the customer on a deferredpayment basis and the price is payable in instalments. • Bai Salam: means a contract in which advance payment is made for goods to be delivered later on. It’s like a forward or a futures contract. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. • Sukuk or ‘Islamic bonds’: Sukuk means bond, or indenture. In the West, bonds are used when a person borrows money, and then they pay a fixed interest rate to the bondholder each year. Sukuks are actually backed by the fixed asset, and the bond holders all have ownership of the asset and can use it. Profits are distributed to all. Monitoring all of this is the Sharia Compliance Board, a committee of Muslim scholars that issues a ruling as to whether a particular undertaking is in accordance with sharia. Sharia Boards may have different interpretations and advise differently because, in Islam, there is no generally accepted codification of the jurisprudence or a formal clergy, per se.44

FINDING AN ‘IMPACT INVESTOR’ Turning now to conditions after the global financial crisis, many people realised that financial markets and the investor community no longer wanted ‘designer instruments of greed’ that got the world into trouble. If there has been any unseen benefit within that massive financial cloud, it is the wake-up call for investors. Some now look for ways to make an impact that prevents future market meltdowns and avoids catastrophic climate change. The profits are the lure, in addition to the social benefits. The new economy needs innovation and capital to generate jobs and energy independence. There could be millions of jobs in recycling, solar, wind, water and biofuels, as well as in energy conservation (homes and buildings) and greener transportation. Investors are looking for companies that pursue a clear sustainability agenda alongside a traditional financial return.45

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Entering now to centre stage are the impact investors who seek to produce beneficial social outcomes that would not occur but for their investments in social enterprises.46 Recent reports have estimated a global market of at least $500 billion for this type of investment over the next decade.47 True, impact investors have been around for some time. In the past we called this socially responsible investing (SRI), sustainable investing or ethical investing. These are the investors who seek financial return just like traditional VC, but they also insist that this return serves the cause of social good. These ethical investors have various motivations. On the negative side, they don’t fund disadvantageous labour conditions, child labour, weapons, alcohol, tobacco, pornography, environmental pollution, unethical business conduct, nuclear power and social inequality. On the positive side, they do fund environmental protection, energy conservation, wind power, conservation of natural resources, advantageous labour conditions, leadership, women at work, improvement of education, and social equality.48 Globally, the SRI movement has centred on the Principles for Responsible Investment (PRI), which provide a framework for incorporating environmental, social and governance (ESG) into investment decision-making and ownership practices.49 Coordinated by the United Nations Environment Programme Finance Initiative and the UN Global Compact, the PRI were designed to align the goals of investors with the sustainable development objectives of the United Nations, in particular, addressing human rights, labour standards in the supply chain, environment and anti-corruption. The investors that are part of PRI pledge to: • incorporate ESG issues into investment analysis and decision-making processes • be active owners and incorporate ESG issues into their ownership policies and practices • seek appropriate disclosure on ESG issues by the entities in which they invest • promote acceptance and implementation of the Principles within the investment industry • work together to enhance their effectiveness in implementing the Principles • report on their activities and progress towards implementing the Principles. SRI investors are actively looking for businesses with social missions that have solid business plans and proven profits as well. How do you find socially responsible investment for your venture? Be sure that your new venture can attract SRI by assessing your environmental, social and ethical policies. You will need to be able to prove that you embrace principles such as environmental sustainability, community activism and shareholder participation and that you have a positive work environment with employee benefits. Network around at VC and SRI conferences so that you can present your pitch to investors interested in socially responsible investing. If your business plan fits the bill, what are the criteria that impact investors have in mind? These are some of the questions they might ask you: • What evidence exists that your customers’ lives will be measurably better for having used your new product or service innovation? • Does your business positively impact quality of life and socio-economic well-being at the base of the pyramid? • Can you give a convincing argument that the product works/delivers value and that you can measure impact? • Do you have evidence that existing solutions are not sufficient and that your price point is competitive? • Have you tested the market to see if your customers will pay for the product?50

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MICRO-CREDIT Another source of capital are the micro-enterprise development programs that give very small loans (micro-loans) to aspiring entrepreneurs who lack collateral to offer as security to a bank, who usually are not steadily employed or have no credit history. Micro-credit (or loans to poor micro-enterprises) should not be confused with micro-finance, which addresses a full range of banking needs for poor people. In the East Asia and the Pacific regions in 2010 there was $21.2 billion of micro-credit loans and 15.8 million active borrowers with an average loan amount of $305 (see Table 14.9). TABLE 14.9 COUNTRY

ASIA–PACIFIC COUNTRIES RATE OF MICRO-CREDIT ACTIVITY NUMBER OF MICRO-CREDIT INSTITUTIONS

NUMBER OF ACTIVE BORROWERS

GROSS LOAN PORTFOLIO

China

39

536 313

15 005 908 642

Vietnam

34

7 627 681

5 888 878 961

Cambodia

16

1 571 655

2 089 971 063

Philippines

23

2 625 606

560 117 177

Indonesia

7

401 518

10 940 963 481

16

30 579

73 407 291

Papua New Guinea

1

2 172

12 733 165

East Timor

2

16 864

7 544 196

Samoa

1

6 482

2 350 677

Tonga

1

4 230

2 000 068

Laos

Source: Microcredit Information Exchange, http://www.mixmarket.org. Copyright ª Microcredit Information Exchange. Used by permission.

Helms distinguishes between four types of micro-finance providers.51 • Informal financial service providers: moneylenders, pawnbrokers, savings collectors and money-guard services can also be costly. Many people lose their money. • Member-owned organisations: self-help groups, credit unions and a variety of hybrid organisations such as financial service associations. They are managed by poor people themselves, but they may have little financial skill. • Non-governmental organisation (NGOs): Grameen Bank was the forerunner in Bangladesh. They have proven very innovative, pioneering banking techniques like solidarity lending, village banking and mobile banking that have overcome barriers to serving poor populations. • Formal financial institutions: commercial banks, state banks, agricultural development banks, savings banks, rural banks and non-bank financial institutions. They are regulated and supervised, but often are reluctant to adopt social missions. The banks now see the poor as well as start-up entrepreneurs as valuable ‘pre-banking customers’ who can be cultivated to become more affluent customers.

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HOW MICRO-CREDIT WORKS Ten years ago, Gangadhara Kotyan, 34, a school dropout, worked as a salesman in a bookshop in Karnataka’s Madanthyar village for a meagre monthly salary of 1500 rupees ($30). ‘We were nine children, including five girls,’ he says. ‘We had to feed them all.’ Today he owns a bookshop, and earns about 25 000 ($500) a month. IN PRACTICE Kotyan’s lot changed when he borrowed from Shri Kshetra Dharmasthala Rural Development Project, a micro-credit agency in Kerala State. With this money, he bought a bookshop, and developed his business. ‘I have been able to marry off two sisters and raise a rubber plantation and coconut on our land thanks to my business income,’ he says. He owns eight acres of farmland now. He is one of around 2.3 million people lifted out of poverty by a widespread micro credit movement, launched in 1995 by the Shri Manjunatha Swamy Temple, the famous Hindu centre of worship. The movement, with 230 000 self-help groups, is spread across 16 districts of Karnataka, as well as in Kasargod, Kerala, and is poised to touch 335 000 groups by the end of this fiscal year. The trust has a field staff of about 6000, all from local villages, who organise the self-help groups and handhold them on a regular basis. ‘They help individuals with their business plans, take up livelihood activities, but also inculcate the habit of savings and repayment,’ says the Trust’s Executive Director. The members save about 10 to 20 rupees a week, and the self-help groups keep these funds in their individual bank accounts. Where there are no bank branches, the trust manages them. A member can get a loan of anywhere between 10–30 000 rupees. The self-help group he is attached to provides it from its own savings – if it has enough – or with the assistance of the trust. The trust borrows from a clutch of banks at 12 per cent interest and lends to the groups at 18 per cent. The interest income the trust earns is ploughed back into community welfare projects related to drinking water, sanitation, water purification, etc.

ENTREPRENEURSHIP

Source: Balasubramanyam, K. R., ‘Self-help groups: In the name of the Lord’, Business Today (India), 6 January 2013, 22(1), 120–2, http:// businesstoday.intoday.in/story/self-help-groups-helping-millions-come-out-of-poverty/1/190759.html. Copyright ª 2013 by Living Media India Limited. Used by permission.

PEER-TO-PEER LENDING Social lending is a very a twenty-first-century phenomenon. The Internet not only levels the playing field; it also can do away with those slow-moving, and costly intermediaries known as banks by bringing pools of borrowers together with individual investors.52 Borrowers who can construct a viable story can influence lenders. Peer-to-peer lending (P2P) loans are typically funded by a number of individuals coming together on a fractional basis. For example, a loan of $1000 to a specific borrower is often funded by $25 investments from 40 different lenders. Social lending sites charge fees for brokering and servicing loans (around 1 per cent from the lender and 2 to 4 per cent from the borrower) and collect penalties for late payments as well. Loan sizes are generally under $25 000. Loan terms are generally three years, and rates range from 9 to 18 per cent. The relatively small loan amounts and the ease with which people can submit their ideas has led many individuals – who otherwise would have avoided pursuing their business venture due to a lack of confidence in their ability to obtain a commercial loan – to view social lending as a low-risk mechanism for getting started. While the use of social lending provides many immediate advantages for entrepreneurs in startup mode, potential dangers include: • Low funding success rate. Most loans are not completed as the funding success rate is about 10 per cent. • Business plan disclosure. The entrepreneur’s business plan is now released to the public domain. • No ongoing counselling relationship. The entrepreneur does not receive any advice or gain experience from the lender, and there are no future rounds of lending or investment.

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• Uncertain regulatory environment. • Lending site track record. While a company’s founding date is not a measure of future performance, you will at least see which ones have established a track record. • Unclear terms and conditions. Frequently asked questions (FAQ) should explain the rules, fees and risks to minimise disappointment.

CROWDFUNDING These days it seems like every entrepreneur has a campaign on Kickstarter, which has seen more than $1 billion pledged since 2009. Crowdfunding makes it possible for entrepreneurs to collect funds through the Internet by ‘open invitation’ to finance their projects/ventures and thus raise the necessary funds by relatively small contributions of a relatively large number of investors.53 Crowdfunding is on an astounding growth curve, from US$89 million in 2010 to US$2.66 billion in 2012.54 By 2015, this figure had reached US$34.4 billion. The reason for the incredible growth is that Asia has become a major crowdfunding region. Accoding to Massolution, Asian crowdfunding volumes grew by 320 per cent, to US$3.4 billion raised, putting it ahead of Europe (US$3.26 billion). North American crowdfunding activity leads the world, growing by 145 per cent and raising a total of US$9.46 billion. Splitting down these volumes, we find that business entrepreneurs collected the most at $6.7 billion in 2014, representing 41 per cent of the total. Social causes ($3.06 billion), films and performing arts ($1.97 billion), real estate ($1.01 billion) and music and recording arts ($736 million) rounded out the top five categories.55 Basically the process works like this: • The entrepreneur sends out an open call for capital over the Internet on a specific crowdfunding platform while providing finance and strategy information and demonstrating that the new product or service saves both time and money to known customers. • The funder notes this opportunity and uses the crowdfunding platform and other sources of information to expand their knowledge about the offer. There is usually an exchange of opinions and experiences with other crowd funders. • The funder makes a decision on funding/investment based upon their estimation of the project’s viability, demand and innovation. • After the entrepreneur raises enough funding, he/she moves into its implementation. Usually there is a reward to the funding community for success such as pre-buy or quantity discounts, public recognition, or access to the entrepreneur and the production team. The three stakeholders in the process – entrepreneur, funder and website platform – have both incentives and disincentives (see Table 14.10). What is the best way to score some crowdfunding on your entrepreneurial journey? Here is some solid advice from been-there, done-that crowd-sourced entrepreneurs.56 • You can’t get anywhere without a solid business plan. Cocktail napkin plans and whiteboard exercises don’t cut it. Use the planning approach you will find in Chapter 16. This will require literally hundreds of hours preparing your business plan as well as your promotional material and social media marketing before you even launch on the crowdfunding platform. • You really do need support during the prelaunch phase from prospective backers who are waiting ‘with bated breath’ for your offer. That means a heavy self-investment in social media marketing and social capital before the train leaves the station. You should have your thought leaders, celebrities and other supporters lined up and ready to back the project. Plus, they should be ready and willing to amplify your messages to their own networks.

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TABLE 14.10

CROWDFUNDING INCENTIVES AND DISINCENTIVES FOR THE THREE STAKEHOLDERS

STAKEHOLDER

INCENTIVES

DISINCENTIVES

Creator/entrepreneur

Lower cost of capital

Entrepreneur typically must disclose his proprietary idea to a larger public

There is a better match between entrepreneurs and investors

Has negative repercussions on patentability

The entrepreneur has access to global funders

Gives competitors inside information

The funder gains early access to the product and recognition for helping innovation

Entrepreneur must (prematurely) disclose staff names

More and better information increases the funders’ willingness

The ‘crowd’ often has no special industry knowledge compared to professional funders

Crowdfunding is a good type of market research

The ‘crowd’ is atomised individuals not networks

Gives entrepreneurs valuable feedback on their project

Because there are more investors, there are more ‘investor management’ issues

Engages potential users in the product design

Entrepreneur must deal with strong personalities

Gives potential funders access to otherwise hidden investment opportunities

Some creators are just plain incompetent

Helps stimulate demand through ‘pre-buying’

Delays and mismanagement are common

Gives the community a feeling of participation

Fraudulent and false information is possible without checking

Gives some funders the feeling of being philanthropists

Early stage projects are inherently risky

Helps formalise the transaction through contracts and terms and conditions

Information is not truly symmetrical

Gives the crowdfunding platform a revenue model (typically 4–5%) based on successful transactions

There is considerable reputation risk with even one failure

Funder/investor

Platform/website

Platform can aggregate proposals into a large pool of offers Able to attract a large community of funders and creators Allows the platform to generate publicity and marketing Adapted from: Agrawal, Ajay, Christian Catalini & Avi Goldfarb, ‘Some simple economics of crowdfunding’, NBER Innovation Policy & the Economy (University of Chicago Press) 14, no. 1 (2014), 63–97. Copyright ª University of Chicago Press. Used by permission.

• It’s all about ‘us.com’. Make it personal. People fund people, not just ideas. Use snappy videos to project your passion and enthusiasm and offer the funders rewards and perks to engage them. • Be ready to respond to (sometimes negative) feedback. Your backers are often ready to offer more than just money. They are a critical resource of ideas and marketing strategy. Make sure you publicise how you are responding with adjustments to their advice. • Don’t go ‘whole hog’ for an impossible amount. Consider a lower funding target. If you achieve your campaign, you can build up a psychological advantage for next steps. Reaching a funding goal means early validation. • Don’t forget your offline world! Most success stories of crowd funding include very real-world components such as launch parties, roundtables and community events.

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• Follow-through is everything. Most backers want your behind-the-scenes views through updates and promised rewards. • Consider follow-up campaigns. Experienced crowd-sourced entrepreneurs advise against done-and-gone. It is actually smart to do successive campaigns. It might be wise to have a series of small campaigns that build upon one another towards a larger funding goal.

RAISING NATURAL CAPITAL Turning now to the planet part of the 3Ps, in this chapter, how does one raise natural capital? You will recall that one of the ‘five capitals’ (see pages 498–9) is called natural capital, namely the stock of natural ecosystems that entrepreneurs use to create goods or services for their markets. Human societies depend for their survival on goods and services provided by both local and global ecosystems. As valuable as they may be, these objects are distributed, sold, used, discarded and then typically dumped back onto the ground. Entrepreneurs must restore, sustain and expand the planet’s ecosystems so that they can re-use natural capital and produce products and services for others. If not, then costs of reinvesting in natural capital will continue to increase with depleting stocks and rising ecological problems, leading to societal pressures through regulation and costly and inefficient governmental actions.57 Entrepreneurial activity – like all economic activity – does not actually create or destroy the Earth’s resources. In accordance with the law of conservation of energy, entrepreneurs only change the location, form and value (usually it is downgraded value) of those resources. Since 1997, we have lost at least US$20 trillion a year globally in non-marketed ecosystem services. Entrepreneurs are no longer limited to take resources from local stocks either. They can tap distant ecosystems with biophysical goods and services produced half a world away and see no connection between their consumer lifestyles and distant ecological consequences. This industrial metabolism (collection of physical processes that convert raw materials into finished products and wastes) is exceedingly complex (see Chapter 3, page 96). Every product has a ‘hidden history’ of its relation to biosphere that we rarely fully appreciate (see Figure 3.11 ‘Entrepreneurial ecology’ in Chapter 3). Climate is one of our key natural capital assets because it protects and underlies the operation of the entire human enterprise. Humans are squandering valuable natural capital that provides important goods and services to the economy, such as recreation, flood protection, nutrient uptake, erosion control, water purification and carbon sequestration. By converting and degrading ecosystems, we are depreciating Earth’s endowment of natural capital. Table 14.11 lists some of the sources of natural capital that an entrepreneur can acquire, or rather borrow, from the biosphere. TABLE 14.11

SOURCES OF NATURAL CAPITAL

ECOSYSTEM SERVICE

ECOSYSTEM FUNCTION

EXAMPLES OF SERVICES THAT NATURAL CAPITAL PERFORMS

Atmospheric stabilisation

Stabilisation of atmospheric chemical composition

CO2/O2 balance, stratospheric ozone, SO2 levels

Climate stabilisation

Regulation of global temperature, precipitation and other climate processes affected by land use

Greenhouse gas production, cloud formation

Disturbance avoidance

Integrity of ecosystem responses to environmental fluctuations

Storm protection, flood control, drought recovery and how vegetation structure helps control environmental variability

Water stabilisation

Stabilisation of hydrological flows

Supply water for agriculture use (irrigation), industrial use or transportation

Water supply

Storage and retention of water

Water storage by watersheds, reservoirs and aquifers cont.

»

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TABLE 14.11

SOURCES OF NATURAL CAPITAL (Continued ) EXAMPLES OF SERVICES THAT NATURAL CAPITAL PERFORMS

ECOSYSTEM SERVICE

ECOSYSTEM FUNCTION

Erosion control and sediment retention

Retention of soil within an ecosystem

Prevention of soil loss by wind, runoff, other processes, storage of silt in lakes, wetlands, drainage

Soil formation

Soil formation process

Weathering of rock and accumulation of organic material

Nutrient cycling

Storage, internal cycling, processing and acquisition of nutrients

Nitrogen fixation, nitrogen/phosphorus, etc. nutrient cycles

Waste treatment

Recovery of mobile nutrients and removal or breakdown of excess nutrients and compounds

Waste treatment, pollution control, detoxification

Pollination

Movement of floral pollinators

Providing pollinators for plants

Biological control

Regulation of pest populations

Predator control of prey species

Habitat

Habitat for resident and transient populations

Nurseries, habitat for migratory species, regional habitats for locally harvested species, wintering grounds

Raw materials

Natural resource primary production

Lumber, fuels, fodder, crops, fisheries

Genetic resources

Sources of unique biological materials and products

Medicine, products for materials, science, genes for plant resistance and crop pests, ornamental species

Recreation

Provides opportunities for recreation

Ecotourism, sports fishing, swimming, boating, etc.

Cultural

Opportunities for non-commercial uses

Aesthetic, artistic, education, spiritual, scientific, Indigenous sites

Sources: Adapted from Amanda Sauer (2002), The values of conservation easements discussion paper, World Resources Institute, presented by West Hill Foundation for Nature, 1 December 2002, http://www.statcan.gc.ca/pub/16-201-x/2011000/t232-eng.htm; Costanza, R. et al. (1997), The value of the world’s ecosystem services and natural capital, Nature, 387: 253–60; Nancy Olewiler, The value of natural capital in settled areas of Canada, Published by Ducks Unlimited Canada and the Nature Conservancy of Canada, 36 pp., ª 2004.

When the entrepreneur realises that material inputs are running low, they have to take action to keep the assembly lines running. Basically, they have to call upon the Earth’s ecosystems so as not to decrease production. Whether it be oil, water, bauxite or fish, access to natural capital is essential. The entrepreneur has to compete with other companies to maintain access to these resources and ‘The Tragedy of the Commons’ (see Chapter 3, page 82) ensues in which multiple entrepreneurs acting independently in their own self-interest can ultimately destroy a shared limited resource, even where it is clear that it is not in anyone’s long-term interest for this to happen.58 What this means is that abuserentrepreneurs are imposing costs on the rest of the economy and the rest of humanity. Transportation entrepreneurs pollute everyone’s atmosphere. Chemical entrepreneurs create pesticides found in creatures large and small. Paper entrepreneurs pollute streams that flow large distances downstream. Not only do these entrepreneurs get a free ride, but the rest of society is also supposed to pay for the cleanup, depletion and loss (which encourages the abuser even more). In their own and everyone’s interests, entrepreneurs of the twenty-first century will have to learn how not to liquidate or devalue natural capital. Entrepreneurs of the new era must learn how to conserve existing stocks of natural capital, but also to forgo the subsidies and welfare system that society uses to clean up the mess. The reality is, as Interface CEO Ray Anderson said, ‘there is not an industrial company on Earth that is sustainable in the sense of meeting its current needs without, in

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some measure, depriving future generations of the means of meeting their needs’ (This is the Brundlandt definition of sustainability. See Chapter 3, page 88.).59 How can entrepreneurs have a positive impact on increasing the stock of natural capital?

NATURAL CAPITAL IN A CAN OF COLA In a can of Coke, the can itself is more costly and complicated to manufacture than the ENTREPRENEURSHIP beverage. Bauxite is mined in Australia and trucked to a chemical reduction mill where a halfhour process purifies each ton of bauxite into a half ton of aluminium oxide. When enough of that is stockpiled, it is loaded on a giant ore carrier and sent to Sweden or Norway, where IN PRACTICE hydroelectric dams provide cheap electricity. After a month-long journey across two oceans, it usually sits at the smelter for as long as two months. The smelter takes two hours to turn each half ton of aluminium oxide into a quarter ton of aluminium metal, in ingots 10 metres long. These are cured for two weeks before being shipped to roller mills in Sweden or Germany. There, each ingot is heated to nearly five hundred degrees Celsius and rolled down to a thickness of 3 millimetres. The resulting sheets are wrapped in 10-ton coils and transported to a warehouse, and then to a cold rolling mill in the same or another country, where they are rolled tenfold thinner, ready for fabrication. The aluminium is then sent to England, where sheets are punched and formed into cans, which are then washed, dried, painted with a base coat, and then painted again with specific product information. The cans are next lacquered, flanged (they are still topless), sprayed inside with a protective coating to prevent the cola from corroding the can, and inspected. The cans are palletised, forklifted and warehoused until needed. They are then shipped to the bottler, where they are washed and cleaned once more, then filled with a fresh water-based concoction with flavoured syrup, phosphorus, caffeine and carbon dioxide gas. The sugar is harvested from beet fields in France or sugar cane fields in Queensland, Australia, and undergoes trucking, milling, refining and shipping. The phosphorus comes from Idaho, where it is excavated from deep open-pit mines – a process that also unearths cadmium and radioactive thorium. Round the clock, the phosphorus mining company uses the same amount of electricity as a city of 1 000 000 people in order to reduce the phosphate to food-grade quality. The caffeine is extracted from the seeds of the coffee plant native to South America and East Asia using fresh water heated by fossil fuels and ethyl acetate, which itself causes greenhouse gases and ozone depletors. It is then shipped from a chemical manufacturer to the syrup manufacturer in England. The filled cans are seated with an aluminium ‘pop-top’ lid at the rate of 1500 cans per minute, and then inserted into cardboard cartons printed with matching colour and promotional schemes. The cartons are made of forest pulp that may have originated anywhere from Sweden or Siberia to the old-growth, virgin forests of British Columbia that are the home of grizzly, wolverines, otters and eagles. Palletised again, the cans are shipped to a regional distribution warehouse, and shortly thereafter to a supermarket where a typical can is purchased within three days. The consumer buys 12 ounces of the phosphate-tinged, caffeine-impregnated, caramel-flavoured sugar water. Drinking takes a few minutes; throwing the can away takes a second. Source: James Womack & Daniel Jones, Lean thinking: Banish waste and create wealth in your corporation, 2nd edn, Free Press; 2003: 38–40, as adapted by Paul Hawken, Amory Lovins & L. Hunter Lovins, Natural capitalism, New York: Bay Back Books, 1999: 49–50.

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SUMMARY This chapter opened by discussing the five forms of entrepreneurial capital: economic capital (both financial and manufactured capital), human capital, social capital and natural capital. From this context, in this chapter our main focus is on how the entrepreneur can finance a new venture. We start off with a look at how to get money from your own family, through bootstrapping and through informal investors, where budding entrepreneurs have their best chances of being funded. Next we discussed debt and equity financing in the form of commercial banks, trade credit, accounts receivable financing, factoring and finance companies and various forms of equity instruments. Public share offerings have advantages and disadvantages as a source of equity capital. Although large amounts of money can be raised in short periods, the entrepreneur must sacrifice a degree of control and ownership. Private placements are an alternative means of raising equity capital for new ventures. In recent years the venture capital market grew dramatically, but that has changed just as dramatically. Venture capitalists use a number of different criteria when evaluating new-venture proposals. In the main these criteria focus on two areas: the entrepreneur and the investment potential of the venture. The evaluation process typically involves four stages: initial screening, business plan evaluation, oral presentation and final evaluation. Business angels now play an important role in new-venture financing. Everyone with money to invest in new ventures can be considered a source for this type of capital. Entrepreneurs who are unable to secure financing through banks or through public or private share offerings typically will turn to the business angel market by seeking out friends, associates and other contacts who may have (or know of someone who has) money to invest in a new venture. We discussed the interesting emerging landscape of new forms of entrepreneurial capital. For many entrepreneurs in Asia, Islamic finance is a definite option. Islamic finance is based on Islamic law, or sharia, which emphasises justice and partnership. Another important source of capital for entrepreneurs is impact investing from socially responsible investors. Micro-credit and social lending programs give small loans (micro-loans) to aspiring entrepreneurs who lack collateral to offer as security to a bank, who may not be steadily employed, or may have no credit history; or who simply need less money and want to know who their investors are. We then examined two very twenty-first-century ways to raise funding, through peerto-peer lending and through crowdfunding. Finally, we looked at the stock of natural capital and the dilemmas and opportunities that surround that concept. Multiple entrepreneurs acting independently in their own self-interest can ultimately destroy a shared, limited resource.

KEY TERMS AND CONCEPTS 4Fs accounts receivable financing angel capital Bai’ al ’inah Bai Salam build-out allowances business angel capital carrying capacity common shares convertible debentures corporate angels crowdfunding debt financing disclosure dividends

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early stage financing economic capital enthusiast angels entrepreneurial angels equity capital equity financing expansion financing factoring factors of production finance companies financial capital Five Capitals halal finance hire purchase human capital human resources

Review key terms with interactive flashcards

Ijara impact investors informal investors initial public offering (IPO) Islamic banking Islamic finance late-stage funding

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liquidity loan with warrants long-term debt manufactured capital micro-credit micro-finance micro-management angels Murabaha Musharaka natural capital opportunity cost

peer-to-peer lending (P2P) preferred shares principal private offerings private placement professional angels promissory note prospectus return on investment (ROI) seed financing shareholders

shares sharia social capital start-up financing Sukuk trade credit venture capitalists vertical integration white knights whole systems approach

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

21 22 23 24 25 26 27

What are the five forms of entrepreneurial capital? Give examples of each that are not described in the book. Using Figure 14.2, describe some of the sources of capital available to entrepreneurs and discuss how they correlate to the varying levels of risk involved with each stage of the venture. What are the strategies to get money from your family? What must you watch out for? Can you think of any more bootstrapping strategies? How widespread is informal investing in your country? Which type of informal investors demand a lower return on investment (ROI)? What are the 4Fs and can you identify 4F investors that you know? What are some special considerations in approaching the 4Fs for entrepreneurial capital? What are the benefits and drawbacks of equity and of debt financing? Are you personally qualified for a bank loan? Identify and describe four types of debt financing. Which would you use? Why would a start-up company today delay outside investment and build as much value as possible into the business before seeking outside investment? If a new venture has its choice between long-term debt and equity financing, which would you recommend? Why? How has the venture capital market changed in your country since the GFC? What are some of the advantages of going public? What are some of the disadvantages? Using Figure 14.3 (funding stages), where does your present business idea fit in? Some entrepreneurs do not like to seek new-venture financing because they feel that venture capitalists are greedy. In your opinion, is this true? Do these capitalists want too much ROI? Identify and describe four of the most common criteria venture capitalists use to evaluate a proposal. In a new-venture evaluation, what are the four stages through which a proposal typically goes? Describe each in detail. An entrepreneur is in the process of contacting three different venture capitalists and asking each to evaluate her new business proposal. What questions should she be able to answer about each of the three? An entrepreneur of a new venture has had no success in getting financing from formal venture capitalists. He now has decided to turn to the informal risk capital market. Who is in this market? How would you recommend that the entrepreneur contact these individuals? How would you describe the typical business angel? Which source of Islamic finance is most like venture capital? Which form would you most like to score? What is the difference between halal and haram? What practices are forbidden in Islamic businesses? Why do some entrepreneurs need micro-credit? What is the difference between social lending, halal finance, green investment and ethical investment, if at all? Why would you go to crowd funders to get your business off the ground? What is natural capital and why do you think it has been excluded from consideration as entrepreneurial capital in the past?

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28 Look at the sources of natural capital listed in Table 14.11. Which can your business idea not do without? 29 Of all the sources of entrepreneurial capital, which is ideal? Why?

EXPERIENCING ENTREPRENEURSHIP Angel investor versus venture capitalist Directions: Contact a local venture capital firm to schedule an interview with one of the partners. Then contact the local angel network to schedule an interview with an angel investor. If there is no local angel network, contact one of the respected law firms in your area and ask for a recommended source that could serve as an angel investor for the purposes of this exercise. For each interview, simply find out the answer to each component of the comparison table below.

Activity template available online

TOTAL ANNUAL INVESTMENT IN START-UP VENTURES ANGEL

VENTURE CAPITALIST

Total dollars Number of investments Number of investors Per round Entities per round INDIVIDUAL INVESTMENTS IN START-UP VENTURES

Investment size per round Each investor Typical investment stage

CASE STUDIES CASE 14.1 Looking for capital in Malaysia When Ananda and Suda Kumar opened their bookstore one year ago in Malaysia, they estimated it would take them six months to break even. Because they had gone into the venture with enough capital to keep them afloat for nine months they were sure they would need no outside financing. However, sales have been slower than anticipated and most of their funds now have been used to purchase inventory or meet monthly expenses. On the other hand, the store is doing better each month and the Kumars are convinced they will be able to turn a profit within six months. At present, Ananda and Suda want to secure additional financing. Specifically, they would like to raise $100 000 to expand their product line. The store currently focuses most heavily on how-to-do-it books and is developing a loyal customer following. However, this market is not large enough to carry the business. The Kumars feel that if they expand into an additional market such as cook books, they can develop two market segments that, when combined, would prove profitable. Suda is convinced that cook books are an important niche and she has saved clippings from national

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newspapers and magazines reporting that people who buy cook books tend to spend more money per month on these purchases than does the average book buyer. Additionally, customer loyalty among this group tends to be very high. The Kumars own all of their inventory, which has a retail market value of $280 000. The merchandise cost them $140 000. They also have at a local bank a line of credit of $10 000, of which they have used $4000. Most of their monthly expenses are covered out of the initial capital with which they started the business ($180 000 in all). However, they will be out of money in three months if they are not able to get additional funding. The owners have considered investigating a number of sources. The two primary ones are a loan from their bank and a private shares offering to investors. They know nothing about how to raise money and these are only general ideas they have been discussing with each other. However, they do have a meeting scheduled with their accountant, a friend, who they hope can advise them on how to raise more capital. For the moment, the Kumars are focusing on writing a business plan that spells out their short business history and objectives, and explains how much money they would like to raise and where it would be invested. They hope to have the plan completed before the end of the week and take it with them to the accountant. The biggest problem they are having in writing the plan is that they are unsure of how to direct their presentation. Should they aim it at a banker or a venture capitalist? After their meeting with the accountant, they plan to refine the plan and direct it towards the appropriate source. QUESTIONS

1 2 3 4

Would a commercial banker be willing to lend money to the Kumars? How much? On what do you base your answer? Would this venture have any appeal for a venture capitalist? Why or why not? If you were advising the Kumars, how would you recommend they seek additional capital? Be complete in your answer. Which form of Islamic finance would you recommend to them?

CASE 14.2 The 120 million baht venture The Friendly Market is a large supermarket in a Thai provincial city. ‘Friendly’s’, as it is popularly known, has more sales per square metre than any of its competitors because it lives up to its name. The personnel go out of their way to be friendly and helpful. If someone asks for a particular brand-name item and the store does not carry it, the product will be ordered. If enough customers want a particular product, it is added to the regular line. Additionally, the store provides free delivery of groceries for elderly citizens and credit for those who have filled out the necessary application and have been accepted into the ‘Friendly Credit’ group. The owner, Pacapol Anurit, believes that his marketing-oriented approach can be successfully used in any area of the country. He is therefore thinking about expanding and opening two new stores, one in the northern part of the same city and the other in a city located 50 kilometres east. Locations have been scouted and a detailed business plan has been drawn up. However, Pacapol has not approached anyone about providing the necessary capital. He estimates he will need about THB 120 million ($AUD4 million) to get both stores up and going. Any additional funding can come from the current operation, which has a cash flow of about THB 4 million monthly. Pacapol first considers two avenues are available to him: debt and equity. His local banker has told him the bank would be willing to look over any business plan he submits and would give him an answer within five working days. Pacapol is convinced he can get the bank to lend him THB 120 million. However, he does not like the idea of owing that much money. He believes he would be better off selling shares to raise the needed capital. Doing so would require him to give up some ownership, but this is more agreeable to him than the alternative. The big question now is: How can the company raise THB 120 million through a shares offering? Pacapol intends to check into this over the next four weeks and make a decision within eight weeks. A number of customers have approached him over the past year and have asked him if he would consider making a private shares offering. Pacapol is convinced he can get many of his customers to buy into the venture, although he is not sure he can raise the full THB 120 million this way. The other approach he sees as feasible is to raise the funds through an informal investor network connected with the ICC chain of food products. This might be the best way to get such a large sum, but Pacapol wonders how difficult it would be to limit his food range to ICC products on a long-term basis. In any event, as he said to his wife yesterday: ‘If we’re going to expand, we have to start looking into how we can raise more capital. I think the first step is to identify the best source. Then we can focus on the specifics of the deal’.

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QUESTIONS

1 2 3

What would be the benefits of raising the THB 120 million through a private placement? What would be the benefits of raising the money through ICC? What are the risks and benefits of going through the bank? Of these three approaches, which would be best for Pacapol? Why? What would you recommend Pacapol do now? Briefly outline a plan of action he can use to get the financing process started.

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. business angel crowdfunding equity capital equity financing 1

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Search (business angel). Read Maxwell, Andrew L. and Moren Levesque, ‘Trustworthiness: A critical ingredient for entrepreneurs seeking investors’, Entrepreneurship: Theory and Practice, September 2014, pp. 1057þ. Within the article, using your browser, search for occurrences of ‘trust-building behaviors’. What are trust-building behaviours between the entrepreneur and the business angel? Hint: have a look at Table 1 near bottom of article. Search (carrying capacity) and (planet). Read the fascinating article by Tull, Jim, ‘Abandoning ship Titanistad’, The Futurist, July–August 2014, p. 64. Are there lifeboats on the Titanistad? Search (crowdfunding) and (entrepreneurs). A great supplement to this chapter is Bruton, Garry et al., ‘New financial alternatives in seeding entrepreneurship: Microfinance, crowdfunding, and peer-to-peer innovations’, Entrepreneurship: Theory and Practice, January 2015, pp. 9þ. What is peer-to-peer lending? Is it the same as crowdfunding? Search (factors of production) under Books and read Brun, Michael, ‘Factors of Production’, Encyclopedia of Business and Finance, (ed.) Burton S. Kaliski, 2nd edn vol. 1. Detroit: Macmillan Reference USA, 2007, pp. 289–92. Using your browser, search ‘distinguishing the entrepreneur from the capitalist’. Search (natural capital) under Magazines and read the diverse issues that are covered. Search (social capital) and (entrepreneurship). Locate Daspit, Joshua J. and Rebecca G. Long, ‘Mitigating moral hazard in entrepreneurial networks: Examining structural and relational social capital in East Africa’, Entrepreneurship: Theory and Practice, November 2014, pp. 1343þ. Why are there ‘dysfunctional outcomes associated with a kinship’?

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ENDNOTES 1 See Sullivan, A. & Sheffrin, S. M. (2003). Economics: Principles in action. Upper Saddle River, NJ: Pearson Prentice Hall, 4. These authors do not include natural capital. 2 Forum for the Future. The Five Capitals Model – a framework for sustainability, http://www.forumforthefuture.org/sites/ default/files/project/downloads/fivecapitals-model.pdf. 3 Putnam, R. D. (2001). Bowling alone: The collapse and revival of American community. Simon and Schuster 4 Hawken, P., Lovins, A. & Lovins, L. H. (1999). Natural capitalism. New York: Bay Back Books, 151. 5 Costanza, R. ‘Natural capital’, reviewed by Cutler J. Cleveland (ed.), The Encyclopedia of Earth, http:// www.eoearth.org/view/article/154791. 6 Cassar, G. (2004). The financing of business start-ups. Journal of Business Venturing, 19(2), March, 261–83; Ebben, J. & Johnson, A. Bootstrapping in small firms: An empirical analysis of change over time. Journal of Business Venturing, 21(6), November, 851–65; Gartner, W. B., Frid, C. J. & Alexander, J. C. (2012). Financing the emerging firm. Small Business Economics, 39(3), 745–61; Gregory, B. T., Rutherford, M. W., Oswald, S. & Gardiner, L. (2005). An empirical investigation of the growth cycle theory of small firm financing. Journal of Small Business Management, 43(4), 382–92; Jonsson, S. & Lindbergh, J. (2013). The development of social capital and financing of entrepreneurial firms: From financial bootstrapping to bank funding. Entrepreneurship Theory and Practice, 37(4), 661–86; Korosteleva, J. & Mickiewicz, T. (2011). Start-up financing in the age of globalization. Emerging markets finance and trade, 47(3), 23–49; Seghers, A., Manigart, S. & Vanacker, T. (2012). The impact of human and social capital on entrepreneurs’ knowledge of finance alternatives. Journal of Small Business Management, 50(1), 63–86; Schweinbacher, A. (2007). A theoretical analysis of optimal financing strategies for different types of capital constrained entrepreneurs. Journal of Business Venturing, 22(6), 753–81. 7 Advani, A. (2005). How to make the kitchen table pitch. Entrepreneur, 7 February. 8 Ennico, C. (2002). Accepting money from friends & family. Entrepreneur, 6 May. 9 Bygrave, W. D. & Bosma, N. (2013). Investor altruism: Financial returns from informal investments in businesses owned

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by relatives, friends, and strangers. In Maria Minetti (ed.). The dynamics of entrepreneurship: Evidence from Global Entrepreneurship Monitor Data. Oxford University Press, pp. 77–100. 10 Aged 18–64 years in the general population. For Japan, Korea and India, these data are from 2008. Figures for Hong Kong, Taiwan and Korea are 2003 only. For other countries, averaged over 2002–05. See William D. Bygrave with Stephen A. Hunt, Global Entrepreneurship Monitor 2004 Financing Report, London Business School and Babson College, 2005; William D. Bygrave & Mark Quill, Global Entrepreneurship Monitor 2006 Financing Report, London Business School and Babson College: 2006, available at http:// www.gemconsortium.org. 11 Bygrave, W. D. & Hunt, S. A. (2007). For love or money? A study of financial returns on informal investments in businesses owned by relatives, friends, and strangers. Paper presented at the AGSE Entrepreneurship Research Conference, Queensland University of Australia, Brisbane, Australia. 12 Cradock, M. (2012). How to spot an angel. Fast Thinking, http:// www.glenrockconsulting.com.au/articles. 13 Bygrave & Bosma (2013). See also Burke, Andrew, Andre´ Stel, Chantal Hartog & Abdel Ichou. What determines the level of informal venture finance investment? Market clearing forces and gender effects. Small Business Economics, 42(3) (2014), 467–84. 14 The State of Small Business: A Report of the President, 2007, Washington, DC: Government Printing Office, 25–48; JeanEtienne de Bettignies & James A. Brander, ‘Financing Entrepreneurship: Bank Finance versus Venture Capital, Journal of Business Venturing, 22(6), 2007, 808–32; see also http://www.sba.gov, Services-Financial Assistance, 2008. 15 A complete explanation can be found in Alterowitz, R. & Zonderman, J. (2002). Financing your new or growing business. Canada: Entrepreneur Press; see also Brewer, E. M. (2007). On lending to small firms. Journal of Small Business Management, 45(1), 42–6; and Jess H. Chua, James J. Chrisman, Franz Kellermanns & Zhenyu Wu. Family involvement and new venture debt financing. Journal of Business Venturing, 26(4) (2011), 472–88. 16 Erikson, T. (2002). Entrepreneurial capital: The emerging venture’s most

important asset and competitive advantage. Journal of Business Venturing, 17(3), 275–90; see also Wall, L. D. (2007). On investing in the equity of small firms. Journal of Small Business Management, 45(1), 89–93. 17 Venture Planning Associates. Private placement memorandums, http://www. ventureplan.com/private.placement.html. 18 Cumming, D., Schmidt, D. & Walz, U. Legality and venture capital governance around the world. Journal of Business Venturing, 25(1) (2010), 54–72. 19 Norton, E. & Tenenbaum, B. H. (1993). Specialization versus diversification as a venture capital investment strategy. Journal of Business Venturing, 8(5) (September), 431–42. 20 Cumming, D. & Johan, S. (2010). Venture capital investment duration. Journal of Small Business Management, 48(2), 228–57; Basu, S., Phelps, C. & Kotha, S. Towards understanding who makes corporate venture capital investments and why. Journal of Business Venturing, 26(2) (2011), 153–71; and Petty, J. S. & Gruber, M. In pursuit of the real deal: A longitudinal study of VC decision making. Journal of Business Venturing, 26(2) (2011), 172–88. 21 Interview with Sanjay Subhedar, founding partner of Storm Ventures, Menlo Park, CA, March 2012; and Haemen Dennis Park & H. Kevin Steensma. When does corporate venture capital add value for new ventures. Strategic Management Journal, 33(1) (2012), 1–22. 22 Ghislaine Bouillet-Cordonnier (1992). Legal aspects of start-up evaluation and adjustment methods. Journal of Business Venturing, 7(2) (March), 91–102; PricewaterhouseCoopers, MoneyTree Report, 2011; and Cumming, D., Schmidt, D. & Walz, U. Legality and venture capital governance around the world. Journal of Business Venturing, 25(1) (2010), 54–72. 23 Sharon Gifford (1997). Limited attention and the role of the venture capitalist. Journal of Business Venturing, 12(6), 459–82; and Dimo Dimov, Dean A. Shepherd & Kathleen M. Sutcliffe. Requisite expertise, firm reputation, and status in venture capital investment allocation decisions. Journal of Business Venturing, 22(4) (2007), 481–502. 24 Jonathan D. Arthurs & Lowell W. Busenitz (2006). Dynamic capabilities and venture performance: The effects of venture capitalists. Journal of Business Venturing, 21(2) (March), 195–216; and

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Dirk De Lercq & Harry J. Sapienza. Effects of relational capital and commitment on venture capitalists’ perception of portfolio company performance. Journal of Business Venturing, 21(3) (May 2006), 326–47. See also Charles Baden-Fuller, Alison Dean, Peter McNamara & Bill Hilliard. Raising the returns to venture finance. Journal of Business Venturing, 21(3) (May 2006), 265–85. 25 Howard E. Van Auken (2001). Financing small technology-based companies: The relationship between familiarity with capital and ability to price and negotiate investment. Journal of Small Business Management, 39(3) (2001), 240–58; Joris J. Ebbers & Nachoem M. Wijnberg. Nascent ventures competing for start-up capital: Matching reputations and investors. Journal of Business Venturing, 27(3) (2012), 372–384; and Andrew L. Maxwell & Moren Le´vesque. Trustworthiness: A critical ingredient for entrepreneurs seeking investors. Kuratko, D., Entrepreneurship Theory and Practice 9th edn., 2014, South-Western Cengage Learning. 26 Dirk De Clercq, Vance H. Fried, Oskari Lehtonen & Harry J. Sapienza (2006). An Entrepreneur’s Guide to the Venture Capital Galaxy. Academy of Management Perspectives, 20 (August), 90–112; see also Andrew J. Sherman, Raising capital, 3rd edn. New York: AMACOM Books, 2012; and Yong Li & Joseph T. Mahoney. When are venture capital projects initiated? Journal of Business Venturing, 26(2) (2011), 239–54. 27 Adapted from W. Keith Schilit (1987). How to obtain venture capital. Business Horizons (May/June 1987), 78. Copyright ª 1987 by the Foundation for the School of Business at Indiana University. Reprinted by permission; and interviews with Silicon Valley Venture Capitalists by the author in March 2012. 28 Dean A. Shepherd (1999). Venture capitalists’ introspection: A comparison of ‘in use’ and ‘espoused’ decision policies. Journal of Small Business Management (April), 76–87; and Dean A. Shepherd. Venture capitalists’ assessment of new venture survival. Management Science (May 1999), 621–32; Kollmann, T. & Kuckertz, A. (2010). Evaluation uncertainty of venture capitalists’ investment criteria. Journal of Business Research, 63(7), 741–7. 29 Sapienza, H. J. (1992). When do venture capitalists add value? Journal of Business Venturing, 7, 9–28; see also Florin, J. (2005). Is venture capital worth it? Effects on firm performance and founder returns. Journal of Business Venturing, 20(1), 113–35; and Busenitz, L.

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W., Fiet, J. A. & Moesel, D. D. (2004). Reconsidering the venture capitalists’ value added proposition: An interorganizational learning perspective. Journal of Business Venturing, 19(6), 787–807. 30 Elango, B., Fried, V. H., Hisrich, R. D. & Polonchek A. (1995). How venture capital firms differ. Journal of Business Venturing, 10, 157–79; Shepherd, D. A. & Zacharakis, A. L. (2002). Venture capitalists’ expertise: a call for research into decision aids and cognitive feedback. Journal of Business Venturing, 17(1), 2002: 1–20; and De Clercq, D. & Sapienza, H. J. (2005). When do venture capitalists learn from their portfolio companies? Entrepreneurship Theory and Practice, 29(4), 517–35; Richard Fairchild, An entrepreneur’s choice of venture capitalist or angel-financing: A behavioral game-theoretic approach. Journal of Business Venturing, 26(3) (2011): 359–74. 31 Harold M. Hoffman & James Blakey. You can negotiate with venture capitalists. Harvard Business Review (March/April 1987), 16; Andrew L. Zacharakis & Dean A. Shepherd. The nature of information and overconfidence on venture capitalist’s decision making. Journal of Business Venturing, 16(4) (July 2001), 311–32; Lowell W. Busenitz, James O. Fiet & Douglas D. Moesel. Signaling in venture capitalist – new venture team funding decisions: Does it indicate longterm venture outcomes? Entrepreneurship Theory and Practice, 29(1) (January 2005), 1–12; and Joris J. Ebbers & Nachoem M. Wijnberg. Nascent ventures competing for start-up capital: Matching reputations and investors. Journal of Business Venturing, 27(3) (2012), 372–384. 32 Evanson, D. R. (1998). Where to go when the bank says no. Bloomberg Press, 40–4; and Mark Van Osnabrugge & Robert J. Robinson, Angel investing: Matching startup funds with startup companies, San Francisco, CA: JosseyBass, 2000. 33 William E. Wetzel, Jr. (1989). Angel money. In-Business (November/December 1989), 42–4; and Colin M. Mason & Richard T. Harrison. Is it worth it? The rates of return from informal venture capital investments. Journal of Business Venturing, 17(3) (2002), 211–36. 34 Abimbola, Temi, Myfanwy Trueman, Oriol Iglesias, Rusnah Muhamad, T. C. Melewar & Sharifah Faridah Syed Alwi. Segmentation and brand positioning for Islamic financial services. European Journal of Marketing, 46(7/8) (2012), 900–21; Ahmad, I.-a.-D. (2009). Editorial: Islam and the free-market economy.

Economic Affairs, pp. 2–3; Al-Alak, B. A. M. & Eletter, S. (2010). Islamic entrepreneurship: An ongoing driver for social change. Interdisciplinary Journal of Contemporary Research in Business, 1(12), 81–97; Elfakhani, Said & Zafar U. Ahmed. Philosophical basis of entrepreneurship principles within an Islamic ethical framework. Journal of Transnational Management, 18(1) (2013), 52–78; Ghoul, W. A. Islam and entrepreneurship. In Dana, Leo Paul (2011), World Encyclopedia of Entrepreneurship. Cheltenham, UK; Northampton, MA: Edward Elgar, 2011, pp. 293–301; Habibollah, S., Armesh, H. & Nikbin, D. (2010). Waqf as a social entrepreneurship model in Islam. International Journal of Business & Management, 5(7), 179–86; Hamid, S. A. & Sa’ari, C. Z. (2011). Reconstructing entrepreneur’s development based on al-Qur’an and alHadith. International Journal of Business & Social Science, 2(19), 110–16; Hassan, M. Kabir & William J. Hippler III. Entrepreneurship and Islam: An overview. Econ Journal Watch, 11(2) (2014), 170–8; Kayed, R. N. & Hassan, M. K. (2010). Islamic entrepreneurship: A case study of Saudi Arabia. Journal of Developmental Entrepreneurship, 15(4), 379–413; Koehler, B. (2009). Islamic finance as a progenitor of venture capital. Economic Affairs, 29(4), 89–91; Koehler, B. (2011). Female entrepreneurship in early Islam. Economic Affairs, 31(2), 93–5; Makhbul, Z. M. & Hasun, F. M. (2011). Entrepreneurial success: An exploratory study among entrepreneurs. International Journal of Business & Management, 6(1), 116–25; McIntosh, J. C. & Islam, S. (2010). Beyond the veil: the influence of Islam on female entrepreneurship in a conservative Muslim context. International Management Review, 6(1), 102–8; Murray, Hunter. Entrepreneurship as a means to create Islamic economy. Economics, Management & Financial Markets, 9(1) (2014), 75–100; Noruzi, M. R. (2011). A quick look on Islamic entrepreneurship. Interdisciplinary Journal of Contemporary Research in Business, 2(10), 478–84; Pio, E. (2010). Islamic sisters. Spirituality and ethnic entrepreneurship in Sweden. Equality, Diversity & Inclusion, 29(1), 113–30; Pistrui, D. & Fahed-Sreih, J. (2010). Islam, entrepreneurship and business values in the Middle East. International Journal of Entrepreneurship & Innovation Management, 12(1), 107–18; Pistrui, David & Josiane Fahed-Sreih. Islam, entrepreneurship and business values in the Middle East. International Journal of Entrepreneurship & Innovation

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Management, 12(1) (2010), 107–18; Shahinpoor, N. (2009). The link between Islamic banking and microfinancing. International Journal of Social Economics, 36(9/10), 996–1007; Tlaiss, Hayfaa A. How Islamic business ethics impact women entrepreneurs: Insights from four Arab Middle Eastern countries. Journal of Business Ethics (2014). 35 Kayed, R. N. & Hassan, M. K. (2010). Islamic entrepreneurship: A case study of Saudi Arabia. Journal of Developmental Entrepreneurship, 15(4), 379–413. 36 Wikipedia. Inventions of the Islamic Golden Age, http://en.wikipedia.org/wiki/ Inventions_in_the_Islamic_world. 37 See Koran verses (35:29), (26:207), (17:82) as cited by Murray, Hunter. Entrepreneurship as a means to create Islamic economy. Economics, Management & Financial Markets, 9(1) (2014), 75–100. 38 Non-Muslims flock to ‘safe haven’ Sharia bank protected from the crunch. Daily Mail (UK), 6 October 2008. 39 Audretsch, D. B., Bonte, W. & Jagannadha Pawan Tamvada. Religion and entrepreneurship. CEPR Discussion Papers 6378, http://ideas.repec.org/p/cpr/ ceprdp/6378.html. 40 Coote, M. (2008). The lure of Islamic finance. National Business Review, New Zealand, 21 August. 41 Wahyuana. Islamic finance is going global. The Tharwa Review, 6 February 2008, http://www.commongroundnews.org/ article.php?id¼22534&lan¼en&sp¼0. 42 An excellent resource is Mashreq Al Islami. (2012). Trade Finance Solutions from http://www.mashreqalislami.com/ en/sme_banking/business-finance/tradefinance-solutions/index.aspx. 43 Huma Qureshi. (2008). Shariacompliant mortgages are here – and they’re not just for Muslims. The Observer (London), 29 June. 44 Grapeshisha Newsletter. A basic guide to Islamic finance. 19 March 2006, http:// www.grapeshisha.com/a-basic-guide-toIslamic-finance-newsletter.html. 45 Avery, Helen. (2012). Impact investing: Making money make an impact. Euromoney, 42(514) (2012), 2–2. 46 Brest, Paul & Kelly Born. (2013). When can impact investing create real impact? Stanford Social Innovation Review, 11(4), 22–31. See also Frank, Roger. Impact investing: What exactly is new? Stanford Social Innovation Review, 10(1) (2012), 17–18; Moon, Laura, Sarah Appleby & V. Kasturi Rangan. The promise of impact investing. Harvard Business Review, 1, 2012, https://hbr.org/

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product/the-promise-of-impact-investing/ 512045-PDF-ENG; Nee, Eric. Impact investing grows up. Stanford Social Innovation Review, 11(1) (2013), 4–4. 47 Moon, Laura, Sarah Appleby & V. Kasturi Rangan. The promise of impact investing. 48 Haigh, Matthew & James Guthrie. Management practices in Australasian ethical investment products: A role for regulation? Business Strategy & the Environment (John Wiley & Sons, Inc.), 19(3) (2010), 147–63; Hofmann, Eva, Katja Meier-Pesti & Erich Kirchler. The decision process for ethical investment. Journal of Financial Services Marketing, 12(1) (2007), 4–16; Hofmann, Eva, Elfriede Penz & Erich Kirchler. The ‘whys’ and ‘hows’ of ethical investment: Understanding an early-stage market through an explorative approach. Journal of Financial Services Marketing, 14(2) (2009), 102–17. 49 See Principles for Responsible Investment, http://www.unpri.org/aboutpri/faqs. 50 Inspired by Ebrahim, A. & Rangan, V. K. (2011). Acumen fund: Measure in impact investing. Harvard Business School Case 9-310-011, 9 May 2011. See also Chu, M. & Tahilyani, R. Aspada. In search of the right structure for impact investing. Harvard Business School Case 9-314-099, 29 July 2014; and Rangan, V. K. & Appleby, S. Bridge ventures. Harvard Business School Case 9-514-001, 17 June 2014. 51 Helms, B. (2006). Access for All: Building Inclusive Financial Systems. World Bank, https://openknowledge. worldbank.org/handle/10986/6973. 52 Bachmann, Alexander, Alexander Becker, Daniel Buerckner, Michel Hilker, Frank Kock, Mark Lehmann, Phillip Tiburtius & Burkhardt Funk. Online peerto-peer lending – a literature review. Journal of Internet Banking & Commerce, 16(2) (2011), 1–18; Herzenstein, Michal, Scott Sonenshein & Utpal M. Dholakia. Tell me a good story and I may lend you money: The role of narratives in peer-topeer lending decisions. Journal of Marketing Research (JMR), 48 (2011), S138–S149; Johnson, Susan, Arvind Ashta & Djamchid Assadi. Online or offline? The Rise of ‘peer-to-peer’ lending in microfinance. Journal of Electronic Commerce in Organizations, 8(3) (2010), 26–37; Kador, John. An advisor’s guide to peer-to-peer investing. REP, 38(7) (2014), 43–8; Weisser, Cybele. Play banker to your peers. Money, 42(11) (2013), 33.

53 Agrawal, Ajay, Christian Catalini & Avi Goldfarb. Some simple economics of crowdfunding. NBER Innovation Policy & the Economy (University of Chicago Press), 14(1) (2014), 63–97; Belleflamme, Paul, Thomas Lambert & Armin Schwienbacher. Individual crowdfunding practices. Venture Capital, 15(4) (2013), 313–33; Belleflamme, Paul, Thomas Lambert & Armin Schwienbacher. Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5) (2014), 585–609; Gobble, Mary Anne M. Everyone is a venture capitalist: The new age of crowdfunding. Research Technology Management, 55(4) (2012): 4–7; Golic´, Z. (2014). Advantages of crowdfunding as an alternative source of financing of small and medium-sized enterprises. Zbornik radova Ekonomskog fakulteta u Istocˇnom Sarajevu (8), 39–48 [in English]. 54 MacLellan, K. (2012). Global crowdfunding volumes rise 81% in 2012. Huffington Post/Reuters, 4 August 2013, http://www.huffingtonpost.com/2013/04/ 08/global-crowdfunding-rises-81percent_n_3036368.html. 55 Massolution (2015). 2015CF Crowdfunding industry report, http:// www.crowdsourcing.org/editorial/globalcrowdfunding-market-to-reach-344b-in2015-predicts-massolutions-2015cfindustry-report/45376. 56 The text following in this section is adapted from Helmer, Jodi. 8 ways to cut through the crowdfunding clutter. Entrepreneur, 42(6) (2014), 86–90. 57 Recent articles include: Blignaut, James N. & Leandri van der Elst. Restoration of natural capital: Mobilising private sector investment. Development Southern Africa, 31(5) (2014): 711–20; Dasgupta, Partha. Natural capital in the macroeconomy. Environment & Development Economics, 19(3) (2014): 307–11; Gardiner, Barry. Why natural capital is so very dangerous. ENDS (Environmental Data Services), 467 (2014): 8–9; Hamilton, Kirk & Cameron Hepburn. Wealth. Oxford Review of Economic Policy, 30(1) (2014), 1–20; Helm, Dieter. Taking natural capital seriously. Oxford Review of Economic Policy, 30(1) (2014), 109–25; Tercek, Mark R. & Jonathan S. Adams. The business case for nature. Conference Board Review, 50(2) (2013): 38–46. 58 Hardin, G. (1968). The tragedy of the commons. Science, 162(3859), 1243–8. 59 Cited in Paul Hawken, Amory Lovins L. & Hunter Lovins, Natural capitalism, New York: Bay Back Books, 1999, p. 168.

» CHAPTER FIFTEEN MEASURING PERFORMANCE FOR ENTREPRENEURIAL VENTURES CHAPTER OBJECTIVES

1 Small company managers are too inclined to delegate to outside accountants every decision about their companies’ financial statements. Indeed, it is most unfair to suppose that accountants can produce – without management’s advice and counsel – the perfect statement for a company. Instead, I contend, top managers of growing small companies must work with their independent accountants in preparing company financial statements to ensure that the right message is being conveyed . . .

To distinguish between two kinds of performance measurement and their importance/relevance to entrepreneurs

2 To explain the principal financial statements needed for any entrepreneurial venture – the balance sheet, income statement and cash-flow statement 3 To outline the process of preparing an operating budget 4 To discuss the nature of cash flow and to explain how to draw up such a document 5 To explain how capital budgeting can be used in the decisionmaking process 6 To illustrate how to use break-even analysis

James McNeill Stancill, ‘Managing financial statements: Image and effect’1

7 To describe ratio analysis and illustrate the use of some of the important measures and their meanings

Companies must be prepared to respond to the growing demands for transparency and accountability, particularly with respect to their economic, social, and environmental impact. This requires, first and foremost, that those who run the businesses be aware of the challenges and opportunities they face in the age of globalisation. Here, business schools can play a crucial role by ensuring that tomorrow’s business leaders understand what responsible business means and how it can have positive effects for both the company’s bottom line and the society in which it operates . . . Business success does not rely on financial success as an isolated ideal. Consideration should also be given to environmental and social issues.

8 To understand the importance of triple bottom line accounting

UN Secretary General Ban Ki-moon2

Entrepreneurship

9 To appreciate the diversity of environmental accounting

Visit http://login.cengagebrain. com and use the access code that comes with this book for 24 months access to the CourseMate Express resources for this chapter, including quizzes, videos, games and more.

Chapter 15: Measuring performance for entrepreneurial ventures 537

THE DIMENSIONS OF PERFORMANCE MEASUREMENT Today’s entrepreneur operates in an environment characterised by strong competitors and decreasing resources. Safeguarding of resources, therefore, becomes a top priority. In order to compete, the entrepreneur must accumulate and allocate resources effectively, and use them efficiently. Six kinds of resources are available: the tangible resources, financial, physical and environmental, and the intangible resources, organisational, relational and human. In this chapter we focus on performance measurement of the tangible financial and physical resources and include considerations of the environment. One constant preoccupation for the entrepreneur is measuring of economic performance such as sales revenue, operating budgets, cash flow and the like. Measuring (or ‘accounting for’) these is in the realm of financial accounting, our first topic. Traditionally, companies report on these issues to their shareholders. Increasingly, stakeholders and the public are expecting entrepreneurs to show that they are not merely delivering economic value, but also following socially and environmentally responsible paths. In response to these changing environments we also need to be concerned with a different kind of performance measure which we cover in this chapter. This is where the entrepreneur must come to grips with expanding traditional reporting to take into account environmental and social performance in addition to financial performance. The term we will use is triple bottom line reporting. As the argument intensifies that the Earth’s carrying capacity is becoming more at risk, governments around the world are coming closer to accepting the need for formal metrics for ecological and social loss or risk for companies. We first examine financial performance measures, and then discuss pro forma statements and tools such as break-even analysis, sensitivity analysis and ratio analysis. Finally, we cover important areas of sustainability performance measures.

MEASURING FINANCIAL PERFORMANCE Financial information pulls together all the information presented in the other segments of the business: marketing, distribution, manufacturing and management. It quantifies all the assumptions and historical information concerning business operations.3 It should be remembered that entrepreneurs must make assumptions when numbers are derived and correlate these assumptions with information presented in other parts of the business operations. The set of assumptions on which projects are based should be clearly and precisely presented; without these assumptions, numbers will have little meaning. It is only after carefully considering such assumptions that the entrepreneur can assess the validity of financial projects. Because the rest of the financial plan is an outgrowth of these assumptions, they are the most integral part of any financial statement. (See Table 15.1 for a financial glossary for entrepreneurs.) In order for entrepreneurs to develop the key components of a financial segment they should follow a clear process described in the next section.

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TABLE 15.1

A FINANCIAL GLOSSARY FOR THE ENTREPRENEUR

Accrual system of accounting: A method of recording and allocating income and costs for the period in which each is involved, regardless of the date of payment or collection. For example, if you were paid $100 in April for goods you sold in March, the $100 would be income for March under an accrual system. (Accrual is the alternative and preferred system for accounting to the cash system.) Assets: Anything of value that is owned by you or your business. Balance sheet: An itemised statement listing the total assets, liabilities and net worth of your business at a given moment. Also called a statement of condition. Break-even: The level of sales required to meet the firm’s fixed costs and the expended variable costs associated with production. Until break-even is reached the business will not generate sufficient cash to cover its current and ongoing expenses. Capital: (1) The amount invested in a business by the proprietor(s) or shareholders. (2) The money available for investment or money invested. Cash flow: The schedule of your cash receipts and disbursements. Cash system of accounting: A method of accounting whereby revenue and expenses are recorded when received and paid, respectively, without regard for the period to which they apply. (A cash system is the alternative to the accrual system.) Collateral: Property you own that you pledge to the lender as security on a loan until the loan is repaid. Collateral can be a car, home, shares, bonds or equipment. Cost of goods sold: The value of products sold to customers in a period. This is determined by subtracting the value of the ending inventory from the sum of the beginning inventory and purchases made during the period. It excludes any non-product related expenses, i.e. marketing and other overhead expenses. Gross sales less cost of goods sold gives you gross profit. Current assets: Cash and assets that can be easily converted to cash, such as accounts receivable and inventory; current assets should exceed current liabilities. Current liabilities: Debts you must pay within a year (also called short-term liabilities). Depreciation: Lost usefulness; expired utility; the diminution of service yield from a fixed asset or fixed asset group that cannot or will not be restored by repairs or by replacement of parts. Equity: An interest in property or in a business, subject to prior creditors. An owner’s equity in their business is the difference between the value of the company’s assets and the debt owed by the company. For example, if you borrow $30 000 to purchase assets for which you pay a total of $50 000, your equity is $20 000. Expense: An expired cost; any item or class of cost of (or loss from) carrying on an activity; a present or past expenditure defraying a present operating cost or representing an irrecoverable cost or loss; an item of capital expenditure written down or off; a term often used with some qualifying expression denoting function, organisation, or time, such as a selling expense, factory expense or monthly expense. Financial statement: A report summarising the financial condition of a business. It normally includes a balance sheet and an income statement. Fixed costs: Recurring costs that a firm must pay regardless of product sales. These costs must be met for the firm to stay in business regardless of whether sales occur or not. Gross profit: Sales less the cost of goods sold. For example, if you sell $100 000 worth of merchandise for which you paid $80 000, your gross profit would be $20 000. To get net profit, however, you would have to deduct other overhead expenses incurred during the period in which the sales were made, such as rent, insurance, marketing and sales staff salaries. Income statement: Also called profit and loss (P&L) statement. A statement summarising the income of a business during a specific period. Interest: The cost of borrowing money. It is paid to the lender and is usually expressed as an annual percentage of the loan. That is, if you borrow $100 at 12 per cent, you pay 1 per cent (.01 3 $100) interest per month. Interest is an expense of doing business. Liability: Amount owing to your creditors. Liabilities can be in the form of a bank loan, accounts payable and so on. They represent a claim against your assets. Loss: When a business’s total expenses for the period are greater than the income. Net profit: Total income for the period less total expenses for the period. (See also gross profit.)

Chapter 15: Measuring performance for entrepreneurial ventures 539

TABLE 15.1

A FINANCIAL GLOSSARY FOR THE ENTREPRENEUR (Continued )

Net worth: The same as equity. Personal financial statement: A report summarising your personal financial condition. Normally it includes a listing of your assets, liabilities, large monthly expenses and sources of income. Pro forma (balance sheet): A financial statement that projects the results of future business operations, such as a pro forma balance sheet, an income statement or a cash-flow statement. The term ‘pro forma’ is applied to practices that seek to satisfy the minimum requirements or to conform to convention. The pro forma accounting is a statement of the company’s financial activities excluding ‘unusual and non-recurring transactions’. Profit: (See net profit and gross profit.) ‘Profit’ usually refers to net profit. Profit and loss statement: Same as income statement. Time value of money: The idea that money available today is worth more than the same amount in the future due to its potential interest-earning capacity. Any amount of money is worth more the sooner it is received. Variable cost: Costs that vary with the level of production or sales, such as direct labour, material and sales commissions. Working capital: The excess of current assets over current liabilities.

UNDERSTANDING THE KEY FINANCIAL STATEMENTS Financial statements are powerful tools that entrepreneurs can use to manage their ventures.4 The basic financial statements an entrepreneur needs to be familiar with are the balance sheet, the income statement and the cash-flow statement. The following sections examine each of these in depth and provide a foundation for understanding the books of record that all ventures need.

THE BALANCE SHEET A balance sheet is a financial statement that reports a business’s financial position at a specific time. Many accountants like to think of it as a picture taken at the close of business on a particular day, such as 30 June. The closing date is usually the one that marks the end of the business year for the organisation. The balance sheet is divided into two parts: the financial resources owned by the firm and the claims against these resources. Traditionally, these claims against the resources come from two groups: creditors who have a claim to the firm’s assets and who can sue the company if these obligations are not paid, and owners who have rights to anything left over after the creditors’ claims have been paid. The financial resources that the firm owns are called assets. The claims that creditors have against the company are called liabilities. The residual interest of the firm’s owners is known as owners’ equity. When all three are placed on the balance sheet, the assets are typically listed on the left, and the liabilities and owners’ equity are listed on the right. An asset is something of value, a resource that the business owns. To determine the value of an asset, the owner/manager must do the following: (1) identify the resource, (2) provide a monetary measurement of that resource’s value and (3) establish the degree of ownership in the resource. Most assets can be identified easily. They are tangible, such as cash, land and equipment where value is evidenced through physical use. However, intangible assets also exist whereby the value is not physically evidential, but valuable nonetheless. Examples of intangible assets include intellectual property such as copyrights and patents (see also Chapter 13), databases and customer lists, organisational systems and processes, a firm’s culture and so forth.

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Liabilities are the debts of the business. These may be incurred either through normal operations or through the process of obtaining funds to finance operations. A common liability is a short-term account payable in which the business orders some merchandise, receives it, but has not yet paid for it. This often occurs, for example, when a company receives merchandise during the third week of the month and does not pay for it until it pays all of its bills on the first day of the next month. If the balance sheet was constructed as of the end of the month, the account still would be payable at that time. Liabilities are divided into two categories: short term and long term. Short-term liabilities (also called current liabilities) are those that must be paid during the coming 12 months. Long-term liabilities are those that are not due and payable within the next 12 months, such as a mortgage on a building or a five-year bank loan. Owners’ equity is what remains after the firm’s liabilities are subtracted from its assets – it is the claim the owners have against the firm’s assets. If the business loses money, its owners’ equity will decline. This concept will become clearer when we explain why a balance sheet always balances.5

UNDERSTANDING THE BALANCE SHEET To fully explain the balance sheet and the other concepts in this chapter, we take the example of Ma´mor Chocolates Ltd, an Australian-based limited liability company and manufacturer of fine Pasifika chocolates, bars and truffles. It also runs a retail store.6 Ma´mor is a mixed product-services company; it produces chocolate products and carries out services such as events and education. It started operations in 2001 and is moving from start-up to growth phase in the Pacific-blended gourmet chocolates market. Table 15.2 presents Ma´mor’s balance sheet as of 31 December 2014. Note that Table 15.2 has three sections: assets, liabilities and owners’ equity. Within each of these classifications are various types of accounts. The following sections examine each type of account presented in Table 15.2. TABLE 15.2

´ MOR CHOCOLATES LTD BALANCE SHEET FOR THE YEAR ENDED 31 DECEMBER 2014 MA ASSETS CURRENT ASSETS

Cash

$ 200 000

Accounts receivable

$375 000

Less: allowance for uncollectable accounts

$ 25 000

$ 350 000

Inventory

$ 150 000

Prepaid expenses

$

Total current assets

$ 735 000

35 000

FIXED ASSETS

Land

$ 330 000

Building

$315 000

Less: Accumulated depreciation of building (at 5% annually)

$ 80 000

Equipment

$410 000

Less: Accumulated depreciation of equipment

$ 60 000

(net) $235 000

(net) $350 000

Chapter 15: Measuring performance for entrepreneurial ventures 541

TABLE 15.2

´ MOR CHOCOLATES LTD BALANCE SHEET FOR THE YEAR ENDED 31 DECEMBER 2014 (Continued ) MA ASSETS CURRENT ASSETS

Total fixed assets including land

$ 915 000

Total assets

$1 650 000 LIABILITIES

Current liabilities Accounts payable

$150 000

Notes payable

$ 25 000

Taxes payable

$ 75 000

Loan payable

$ 50 000

Total current liabilities

$ 300 000

Bank loan

$ 200 000

Total liabilities

$ 500 000 OWNERS’ EQUITY

Contributed capital Common shares, $10 par, 40 000 shares Preferred shares, $100 par, 500 shares

$ 400 000 ————

Authorised, none sold Retained earnings

$ 750 000

Total owners’ equity

$1 150 000

Total liabilities and owners’ equity

$1 650 000

Current assets Current assets consist of Ma´mor’s cash and other assets that are reasonably expected to be turned into cash, sold or used up during a normal operating cycle. The most common types of current assets are those shown in Table 15.2. Cash refers to coins, currency and cheques on hand. It also includes money that the business has in its cheque and savings accounts. Accounts receivable are claims that Ma´mor has against its customers for unpaid balances from the sale of merchandise or the performance of services. Many companies sell on credit and expect their customers to pay by the end of the month. Or, in many of these cases, they send customers a bill at the end of the month and ask for payment within a specified time, usually 7, 14 or 30 days. The allowance for uncollectable accounts refers to accounts receivable judged to be uncollectable. How does a business know when receivables are not collectable? This question can be difficult to answer and cannot be definitive. However, one method for making the estimates is to use an accounts receivable ageing schedule. To illustrate, let’s first assume that the business asks all of its customers to pay within the first 10 days of the month following the purchase.

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An examination of Ma´mor’s ageing accounts receivable shows that the following amounts are due to the firm: NUMBER OF DAYS OUTSTANDING

AMOUNT OF RECEIVABLES

1–10

$325 000

11–20

$ 25 000

21–30

$ 20 000

31–60

$

5 000

61–90

$

7 500

91þ

$ 17 500

In this case, the firm might believe that anything more than 60 days old will not be paid and will likely be written off as uncollectable. Note that in Table 15.2 the allowance for uncollectable accounts is $25 000, the amount that has been outstanding more than 60 days. When the amount increases from one period to the next, the amount of this increase is typically classified as an expense. When the company abandons any hope of collection of an account from a specific customer it will reduce both the accounts receivable balance and the balance in the allowance for uncollectable accounts. Inventory is merchandise held by the company for resale to customers. For Ma´mor, this includes chocolate in blocks as well as flavourings and other ingredients. Current inventory in our example is $150 000, but this is not the entire inventory the firm had on hand all year. Naturally the company started the year with some inventory, purchased more, and sold either a finished product produced by combining and preparing the inventory (ingredients) or a finished product purchased at wholesale for stock to customers. This balance sheet figure is the value of the inventory left at the end of the fiscal year. Prepaid expenses are expenses the firm already has paid but that have not yet been used. For example, insurance paid on the company car for the next six months is a prepaid-expense entry because it will be six months before the entire premium has been used. As a result, the accountant would reduce the prepaid amount by one-twelfth each month of the annual amount. Sometimes supplies, services and rent are also prepaid, in which case the same approach is followed.

Fixed assets Fixed assets consist of land, building, equipment and other assets expected to remain with the firm for an extended period. They are not totally used up in the production of the firm’s goods and services within a single period. Some of the most common types are shown in Table 15.2. Land is property used in the operation of the firm. This is not land that has been purchased for expansion or speculation; that would be listed as an investment rather than a fixed asset. Land is listed on the balance sheet at cost, and its value usually is changed only periodically. For example, every five years, the value of the land might be recalculated so that its value on the balance sheet and its resale value are approximately the same. Building consists of the structures that house the business’ manufacturing and retail operations. If the firm had more than one building, the total cost of all the structures would be listed. Accumulated depreciation of building refers to the amount of the building that has been written off the books due to wear and tear. For example, referring to Table 15.2, the original cost of the

Chapter 15: Measuring performance for entrepreneurial ventures 543

building was $315 000, but accumulated depreciation is $80 000, leaving a net value of $235 000. The amount of depreciation charged each year is determined by the company accountant after checking with tax office rules. It is common to apply a standard depreciation percentage per year for new buildings, although an accelerated method is sometimes also used. In any event, the amount written off is a tax-deductible expense. Depreciation therefore reduces the amount of taxable income to the firm and helps lower the tax liability. In this way, the business gets the opportunity to recover part of its investment. Equipment is the machinery that Ma´mor uses to produce finished chocolate goods. It is placed on the books at the original cost and then depreciated and listed as the accumulated depreciation of equipment. In our example, it is $60 000. The logic behind equipment depreciation and its effect on the firm’s income taxes is the same as that for accumulated depreciation on the building.

Current liabilities Current liabilities are obligations that will become due and payable during the next year or within the operating cycle. The most common current liabilities are listed in Table 15.2. Accounts payable are liabilities incurred when goods or supplies are purchased on credit. For example, Ma´mor purchases much of its chocolate from a Swiss supplier. If Ma´mor buys on net 30-day terms, during those 30 days the bill for the goods will constitute an account payable. A note payable is a promissory note given as tangible recognition of a supplier’s claim or a note given in connection with an acquisition of funds. In Ma´mor’s case this was a loan by the Swiss supplier for the roasting and milling machines that transform cocoa beans into chocolate. The Swiss company required that a note be given when Ma´mor bought merchandise and was unable to pay for it immediately. Taxes payable are liabilities owed to the government such as the Australian Goods and Services Tax (GST). In other countries, this might be sales or value-added taxes (VAT). Ma´mor must collect the taxes and remit them to the tax agency. A loan payable listed in current liabilities is the current instalment on a long-term debt that must be paid this year. The remainder is carried as a long-term debt. Note that, in Table 15.2, $50 000 of this debt will be paid in 2015 by Ma´mor.

Long-term liabilities As we have said, long-term liabilities consist of obligations that will not become due or payable for at least one year or not within the current operating cycle. The most common are bank loans. A bank loan is a long-term liability arising from a loan from a lending institution. Although it is unclear from the balance sheet in Table 15.2 how large the bank loan originally was, it is apparently being paid down at the rate of $50 000 annually. Thus, it will take four more years to pay off the loan balance.

Owning shares in a limited company Ma´mor’s founders have shares in the company as do some other individuals who have purchased shares. Various kinds of shares can be sold by a company, the most typical being common shares and preferred shares. Only common shares have been sold by Ma´mor. Common shares are the most basic form of corporate ownership. The owners of a limited company – whether private or public – are referred to as shareholders. An individual can become a part owner of the business by purchasing shares in that business. This ownership gives the individual the right to vote for individuals to serve on the board of directors. Usually, for every common share

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held, the individual is entitled to one vote. As shown in Table 15.2, the company has issued 40 000 shares of $10 par value common shares, raising $400 000. Although the term par value may have little meaning to most shareholders, it has legal implications. It determines the stated minimum value of capital that will be retained in the company. Shares must originally be sold for at least this value or the owner of the shares can face liability to make up the difference. For legal reasons the total par value of the shares is maintained in the accounting records. However, it has no effect on the market value of the shares after issuance. Preferred shares differ from common shares in that their holders have preference to the assets of the firm in case of dissolution. This means that after the creditors are paid, preferred shareholders have the next claim on whatever assets are left. The common shareholders’ claims come last. Table 15.2 shows that 500 preferred shares were issued, each worth a par value of $100, but none have as yet been sold. Therefore, it is not shown as a number on the balance sheet.

Retained earnings Retained earnings are the accumulated net income kept by the business over the life of the business to date. In Table 15.2, the retained earnings are shown as $750 000. Every year this amount increases by the profit the firm makes and keeps within the company. If Ma´mor declares dividends to its shareholders, they, of course, are paid from the total net earnings. Retained earnings are that which remain after the distribution.

WHY THE BALANCE SHEET ALWAYS BALANCES On CourseMate Express read about Enron’s fraudulent accounting practices. Future profits booked today!

By definition, the balance sheet always balances.7 If something happens that increases or decreases one side of the balance sheet, it is offset by something on the other side. Hence, the balance sheet remains in balance. Before examining some illustrations, let us restate the balance-sheet equation: Assets ¼ Liabilities þ Owners’ equity With this in mind, let us look at some examples of typical business transactions and their effect on the balance sheet.

A credit transaction Ma´mor calls one of its suppliers and asks for delivery of $11 000 of materials such as chocolate calettes used in manufacturing. The materials arrive the next day, and Ma´mor takes possession of them. But the bill is to be paid within 30 days. How is the balance sheet affected? Inventory goes up by $11 000 on the assets side of the balance sheet and the accounts payable rises by $11 000 on the liabilities side. The increase in current assets is matched by an increase in current liabilities. Continuing this illustration, what happens when the bill is paid? Ma´mor issues a cheque for $11 000, and cash declines by this amount. At the same time, accounts payable decrease by $11 000. Again, these are offsetting transactions, and the balance sheet remains in balance.

A bank loan Table 15.2 shows that Ma´mor Chocolates Ltd had an outstanding bank loan of $200 000 in 2014. Assume that the company increases this loan by $110 000 in 2015. How is the balance sheet affected? Cash goes up by $110 000 (increasing the total assets), and the bank loan increases by the same amount (increasing the total liabilities). Again, balance is achieved. However, what if the firm uses this $110 000 to buy new machinery? In this case, cash decreases by $110 000 (reducing the cash assets) but equipment increases by the same amount (increasing equipment assets). Thus the total

Chapter 15: Measuring performance for entrepreneurial ventures 545

amount of assets remains unchanged so no equivalent change is made on the liabilities or owners’ equity side. Again, a balance exists. Finally, what if Ma´mor decides to pay off its bank loan? In this case, the first situation is reversed; cash and bank loan (long-term liabilities) decrease in equal amounts.

A sale of shares Suppose that Ma´mor issues and sells another 40 000 shares of $10 par common stock. How does this action affect the balance sheet? (This answer is rather simple.) Common shares increase by $400 000 and so does cash. Once more, a balance exists. With these examples in mind, it should be obvious why the balance sheet always balances. Every entry has an equal and offsetting entry to maintain this equation: Assets ¼ Liabilities þ Owners’ Equity In accounting language, the terms debit and credit denote increases and decreases in assets, liabilities and owners’ equity. Unfortunately, this is not a one-to-one correspondence between the words. The following chart relates debits and credits to increases and decreases. CATEGORY

A TRANSACTION INCREASING THE AMOUNT

A TRANSACTION DECREASING THE AMOUNT

Asset

Debit

Credit

Liability

Credit

Debit

Owners’ equity

Credit

Debit

Applying this idea to the preceding examples results in the following: DEBIT

CREDIT

Credit transaction Inventory

$ 11 000

Accounts payable

$ 11 000

Bank loan Cash

$110 000

Bank loan

$110 000

Shares sale Cash

$400 000

Common shares Total

$400 000 $511 000

$511 000

THE INCOME STATEMENT The income statement is a financial statement that shows the change that has occurred in a firm’s position as a result of its operations over a specific period. This is in contrast to the balance sheet, which reflects the company’s position at a particular point in time.

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The income statement, sometimes referred to as a ‘profit and loss statement’ or ‘P&L’, reports on the success (or failure) of the business during the period. In essence, it shows whether sales revenues were greater than or less than expenses. Most income statements cover a one-year interval, but it is not uncommon to find monthly, quarterly or semi-annual income statements. All of the revenues and expenses accumulated during this time are determined and the net income for the period is identified. Many firms prepare quarterly income statements, but construct a balance sheet only once a year. This is because they are far more interested in their profits and losses than in examining their asset, liability and owners’ equity positions. However, it should be noted that the income statement drawn up at the end of the year will coincide with the firm’s fiscal year, just as the balance sheet does. As a result, at the end of the business year, the organisation will have both a balance sheet and an income statement. In this way, they can be considered together and the interrelationship between them can be studied. A number of different types of income and expenses are reported on the income statement. However, for purposes of simplicity, the income statement can be reduced to three primary categories: (1) revenues, (2) expenses and (3) net income.

HOW TO EVOLVE FROM CEO TO CFO

ENTREPRENEURIAL EDGE

For most entrepreneurs, managing the financial and accounting side of their business is not a core skill set. Many times, it’s easier to focus on other seemingly cooler aspects like marketing, sales and product development. But a solid accounting infrastructure gets the money in the bank . . . and sets up a business for success. For those who are for growth, here are some things to think about.

Do a daily bank reconciliation You need to know your bank balance every day. The good news is with Cloud accounting apps, your bank transactions arrive in your accounting system automatically every day, making it super easy to complete your bank reconciliation. Doing this daily will force you to look at every transaction that is running through your business, so you quickly learn that the small numbers add up and when the big numbers hit. Look at your debtors and creditors every day It’s crucial to take the time and energy to collect your debtors and get paid. Make sure you offer a number of payment options including online. You also need to know what your current outstanding bills are. When you get an invoice from a supplier, enter this into your accounting system, so you don’t forget it and you know how much it is and when it’s due. In aggregate, your payables position must be understood. Never get behind with your creditors. Learn how to read a profit and loss statement and a balance sheet These are without a doubt the two most important financial reports for any business, wherever you are. The best way to build your understanding is to start looking at them. Assess different reporting periods (like Dec11 versus Jan12). A good rule of thumb is to run sales reports weekly and a profit and loss and balance sheet monthly. That’s the minimum. Ask your accountant to not just prepare the reports, but explain what each means to your business. It’s better that you learn how to read basic financial information, that way you can ask smarter questions. Map your business processes into a financial flowchart Your product is in demand, but you can’t buy in fast enough to meet the demand. This is an entrepreneur’s nightmare. Because the cash flow cycle is different for every business, you need to map it, find the bottlenecks and unleash opportunities to free up your cash to allow your business to grow. Get a whiteboard and start drawing a picture of your business process from ordering, selling, payments and receipts. Understand how long your sales process takes and how long before you get the cash. Once you do the maths, you might be surprised about how long it takes. Think of ways to reduce the cycle. For example, you might like to offer a small discount for early payment (that’s another article in itself). cont.

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Chapter 15: Measuring performance for entrepreneurial ventures 547

cont.

Build a basic cash flow forecast You need to know how fast you can run. To do this you need to glance back. Create a monthly cash flow summary report for the past 6–12 months. This will give you a feel for your cash flow cadence, letting you look at the trends and take note of the big items. Then build a new monthly cash flow looking forward. Update the cash flow forecast every month, based on the latest knowledge you have of your business. This shows you how fast you can run, when you can hire the next person, when you can increase inventory levels, when to implement that marketing plan and so on. Think about how new capital will let you run faster Growing businesses burn cash faster than you’d believe. Cash is the big handbrake, so think about how you can get some more. Really successful entrepreneurs are always considering raising capital. Consider ways to make your existing reserves last longer. Making smart decisions in your business means you need to know the financial impact before you decide. Test strategies and try things out before making the final decision and committing resources. This reduces risks but also creates a culture in your business of smart, informed risk taking. Knowledge is power: understand your tax obligation and how to reduce it We all have to pay taxes. Paying taxes is the only expense in your business that will not help you build your business. It is critical to be aware of the ever-evolving tax requirements, deductions and policies. Once you understand your tax obligations and options, it’s best to upload into your cash flow forecast and as payable items in your accounting system. Claim all the expenses you can and create a solid structure that minimises tax and limits liability – ask your accountant for help. While accounting is a specialty area best handled by experts, if you want to be successful in business, you need to take responsibility for making sure you understand the numbers. Source: Adapted from Sutherland, J., How to evolve from CEO to CFO, published by Forbes, ª 2012. http://www.forbes.com.

Revenues are the gross sales the business made during the particular period under review. Revenue often consists of the money actually received from sales, but this need not be the case. For example, sales made on account still are recognised as revenue, as when Ma´mor Chocolate Ltd sells $500 of chocolate corporate gifts to a customer today, delivers them tomorrow and will receive payment two weeks from now. From the moment the goods are delivered the company can claim an increase in revenue. Expenses are the costs associated with producing goods or services. For example, in the preceding paragraph, the expenses associated with the sale would include the costs of acquiring, selling and delivering the merchandise. Sometimes these are expenses that will be paid later. For example, the people who make the chocolate may be paid every two weeks, so the actual outflow of expense money in the form of salaries will not occur at the same time as the work is performed. Nevertheless, it is treated as an expense. Net income is the excess of revenue over expenses during the particular period under discussion. If revenues exceed expenses, the result is a net profit before interest and taxes, sometimes referred to as PBIT. If the reverse is true, the firm suffers a net loss. At the end of the accounting period, all of the revenues and expenses associated with all of the sales of goods and services are added together, then the expenses are subtracted from the revenues. In this way, the firm knows whether it made an overall profit or suffered an overall loss.8 It is this overall figure that determines the firm’s earnings or net income upon which actual tax payable is calculated. Note that interest is seen as a cost of borrowings and by convention (that distinguishes the operational management from the management of the firm’s financing) is also deducted from PBIT to calculate the tax payable. The figure that remains after interest is deducted and taxes paid is sometimes also called net profit after taxes or NPAT.

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UNDERSTANDING THE INCOME STATEMENT Let’s now turn to Ma´mor’s income statement. To explain the income statement fully, it is necessary to examine one and determine what each account is. Table 15.3 illustrates five major sections: (1) sales revenue, (2) cost of goods sold, (3) operating expenses, (4) interest expenses and (5) estimated income taxes. TABLE 15.3

´ MOR CHOCOLATES LTD INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2014 MA

Sales revenue

$1 750 000

Less: sales returns and allowances

$

Net sales

50 000 —————

$1 700 000

Cost of goods sold Inventory, January 2014

$ 150 000

Purchases

$1 050 000

Goods available for sale

$1 200 000

Less: inventory, December 2014

$ 200 000

Cost of goods sold

$1 000 000

Gross profit

$ 700 000

Operating expenses Selling expenses

$ 150 000

Administrative expenses

$ 100 000

Total operating expenses

$ 250 000

Net profit before interest and taxes (also Earnings before interest and taxes)

$ 450 000

Interest expense

$

Estimated income taxes

$ 172 000

Net profit after taxes

$ 258 000

20 000

Revenue Every time Ma´mor sells a chocolate or hosts an event, it obtains revenue. This is often referred to as gross revenue or sales revenue. However, it is usually an overstated figure, because the company finds that some of its goods are returned or some customers take advantage of prompt-payment discounts. In Table 15.3, Ma´mor’s sales revenue is $1 750 000. However, the company also has returns and allowances of $50 000. These returns are common for companies that operate on a ‘satisfaction or your money back’ policy. (Ma´mor keeps tabs on these returns and allowances to see if the total is high in relation to the total sales revenue. If so, the firm will know that something is wrong with what it is selling and it can take action to correct the situation.) Deducting the sales returns and allowances from the sales revenue, the company finds its net sales. This amount must be great enough to offset the accompanying expenses in order to ensure a profit.

Chapter 15: Measuring performance for entrepreneurial ventures 549

Cost of goods sold As the name implies, the cost of goods sold section reports the cost of all the inputs (sugar, cream, chocolate, flavourings, etc.) of the merchandise that Ma´mor has sold during the accounting period. Simply put, the cost of goods for a given period equals the beginning inventory plus any purchases the firm makes minus the inventory on hand at the end of the period. Note that in Table 15.3 the beginning inventory was $150 000 and purchases totalled $1 050 000. This gave Ma´mor goods available for sale of $1 200 000. The ending inventory for the period was $200 000, so the cost of goods sold was $1 000 000. This is what it cost the company to acquire the inventory it sold. When this cost of goods sold is subtracted from net sales the result is the gross profit. The gross profit is the amount available to meet selling, administration and other operating expenses and to provide some net income for the firm’s owners.

Operating expenses The major expenses, exclusive of the costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, to generate the revenue for the period. Expenses often are divided into two broad sub-classifications: selling expenses and administrative expenses. Selling expenses result from Ma´mor’s activities in displaying, selling, delivering and installing its products or performing a service. Expenses for displaying a product include rent for storage space, depreciation on fixtures and furniture, property insurance and utility and tax expenses. Sales expenses, salaries, commissions and advertising also fall into this category. Costs associated with getting the product from the store to the customer also are considered selling expenses. Finally, if a firm installs a product for the customer, all costs – including the parts used in the job – are considered in this total. Taken as a whole, those are the selling expenses. Administrative expenses is a catch-all term for operating expenses not directly related to selling or borrowing. In broad terms these expenses include the costs associated with running the firm. They include salaries of Ma´mor’s managers, expenses associated with operating the office, general expenses that cannot be related directly to buying or selling activities and expenses that arise from delinquent or uncollectable accounts. When these selling and administrative expenses are added together the result is total operating expenses. Subtracting them from the gross profit gives the firm its operating income. Note that, in Table 15.3, selling expenses are $150 000, administrative expenses are $100 000 and total operating expenses are $250 000. When subtracted from the gross profit of $700 000, the operating income is $450 000.

Interest expense The interest expense is the cost of borrowings on long-term loans, also known as debt servicing. As seen in Table 15.3, this expense is $20 000. Additionally, many companies include their costs of short-term borrowing obligations as part of their interest expense.

Estimated income taxes Companies often pay estimated taxes in advance, then, at some predetermined time (for example, 30 June), the books are closed, the cost of borrowings (the interest paid) is deducted and the actual taxes are determined. The firm then settles any additional tax payments if earnings were higher than estimated, or can seek a refund if earnings were less than estimated. When interest and taxes are

550 Part 4: Growth strategies for entrepreneurial ventures

subtracted from the income before interest and taxes, the result is the net profit after taxes (NPAT). In our example, Ma´mor Chocolates made $248 000.

The cash-flow statement The cash-flow statement (also known as statement of cash flows) shows the effects of Ma´mor’s operating, investing and financing activities on its cash balance. The principal purpose of the statement of cash flows is to provide relevant information about the company’s cash receipts and cash payments during a particular accounting period. It is useful for answering such questions as: • How much cash did the firm generate from operations? • How did the firm finance fixed-capital expenditures? • How much new debt did the firm add? • Was the cash from operations sufficient to finance fixed-asset purchases? The statement of cash flows is a supplement to the balance sheet and income statements. One of the limitations of the income and balance sheet statements is that they are based on accrual accounting. In the accrual system of accounting, revenues and expenses are recorded when an obligation is incurred – not when cash changes hands. For example, if Ma´mor makes a sale on credit, under accrual accounting the sale is recognised, but cash has not been received. Similarly, a tax expense may be shown in the income statement, but it may not be paid until later. The statement of cash flows reconciles the accrual-based figures in the income and balance sheet statements to the actual cash balance reported in the balance sheet. The statement of cash flows is broken down into operating, investing and financing activities. Table 15.4 provides an outline of a statement of cash flows. Operating cash flows refer to cash generated from or used in the course of the ordinary business operations of the firm. The net operating cash flows will be positive for most firms, because their operating inflows (primarily from revenue collections) will exceed operating cash outflows (for example, payment for raw materials and wages). Investing activities refer to cash-flow effects from long-term investing activities, such as the purchase or sale of plant and equipment. The net cash flow from investing activities can be either positive or negative. A firm such as Ma´mor that is still in the growth phase would be building up fixed assets (installing new equipment or building new plants) and therefore would show negative cash flows from investing activities. On the other hand, a firm that is shrinking in size by divesting unprofitable divisions may realise cash inflows from the sale of assets and therefore would show a positive cash flow from investing activities. Financing activities refer to cash-flow effects of the financing decisions of the firm, including the sale of new securities (such as shares and bonds), repurchase of securities and payment of dividends. Note that payment of interest to lenders is not included under financing activities. Accounting convention in determining the statement of cash flows assumes that interest payments are part of operating cash flows. Once the cash flows from the three different sources – operating, investing and financing – are identified, the beginning and ending cash balances are reconciled. Up until now we have been examining Ma´mor’s cash-flow statement. While this is most frequently used by those analysing the firm (for example, a bank or venture investor), the cash budget procedure is actually more useful to start-up entrepreneurs and growing firms and will be covered in the next section.

Chapter 15: Measuring performance for entrepreneurial ventures 551

TABLE 15.4

FORMAT OF STATEMENT OF CASH FLOWS

Cash flows from operating activities

$ 50 000

Cash flows from investing activities

$ (10 000)

Cash flows from financing activities

$

Net increase (decrease) in cash

$ 45 000

Cash at beginning of period

$ 400 000

Cash at end of period

$ 445 000

5 000

WATCHING YOUR ACCOUNTS RECEIVABLE One of the primary issues that plagues start-up companies is poor cash flow and one of the ENTREPRENEURSHIP largest contributors to this problem is uncollected accounts receivable. When the economy is in decline, the first tactic that most businesses will employ is to stretch out the payments on their accounts payable as long as they can, which presents an issue for their vendors. Most IN PRACTICE entrepreneurs offer credit to their customers to encourage business, but when those customers choose not to pay off that credit in a timely manner, businesses servicing them can face a cash deficit, making payments to their own vendors problematic. In some cases entrepreneurs are left with no choice but to take on credit cards that charge excessive interest rates just to keep their business afloat. Avoiding this situation takes significant forethought on the part of the management team. A good rule of thumb is to always secure funding before your company needs it. You will usually find cash when in dire straits, but the cost of that capital can be significant. Securing an operating line of credit and keeping tabs on your accounts receivable will help prevent expensive mistakes when the going gets tough. Here are five tips for making sure that you are paid what is coming to you. •

•

•

•

•

Develop a process. Customers will stretch out their payments to you if they think they can get away with it; do not let them. Being consistent when dealing with your customers will let them know that you take collecting your receivables seriously. Establish a payment due date and enforce it. If you let your customers slide, you will be sending them the message that they can pay when they want to, which might work fine when your company is flush with cash, but will be a significant burden if your business hits a lull. Make some noise. Once you have provided a product or service, you are entitled to get paid. You should not feel guilty about contacting your customers about a delinquent payment. After all, you have upheld your end of the deal. Your customers are going to pay the vendors who are the most committed to getting paid. If you choose to sit idle, you may never get your money. Get paid up front. When in doubt, there is no better way to ensure payment than by mandating that your customers pay up front; this is especially useful when working with new clients. You can always charge a percentage so that you and your customers are sharing the burden of responsibility. In the event that you choose to issue credit to a customer, make sure to perform a credit check first. Find an advocate. The person paying your company is most likely not the entrepreneur. Find out who is responsible for issuing payments in each of your respective customers’ businesses so that you get to know her/him. The order in which payments are submitted will usually be at the discretion of this individual, so you stand a greater chance of being at the top of that list if she/he knows you. Know when to walk away. Despite what traditional thinking suggests, customers are not always right and they are not always profitable. The time spent collecting fees from a customer and the cost of carrying the credit for that customer might outweigh the margins that customer’s business is generating. If that turns out to be the case, do not be afraid to discontinue the relationship. Often the costs far outweigh what appears on your financial statements, given that time spent on troublesome customers could be spent acquiring new business. To prevent

cont.

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552 Part 4: Growth strategies for entrepreneurial ventures cont.

•

such issues from burdening your company, conduct annual audits of your customers and consider eliminating those that cost you money. Cash-flow management is a process that never ends for an entrepreneur. Liquidity is an important metric when considering the health of your business; if you are allowing your customers to postpone their payments, you risk them putting your company’s life in jeopardy. Source: Adapted from Prince, C. J. (2008), ‘Time bomb’, Entrepreneur, January, http://www.entrepreneur.com/magazine/entrepreneur/ 2008/january/187658.html, Entrepreneur Media, Inc., ª 2008; and Khanna, R. (2010) ‘Tips on Managing Your Accounts Receivable’, Toolbox.com, ª 2010, http://finance.toolbox.com/blogs/montreal-financial/tips-on-managing-your-accounts-receivable-42717.

PREPARING FINANCIAL BUDGETS Small business owners need to brush up on their maths. Seventy per cent don’t know what depreciation is! Read all about it on CourseMate Express.

One of the most powerful tools the entrepreneur can use in planning financial operations is a budget.9 The operating budget is a statement estimating income and expenses over a specified future period of time. Another common type of budget is the cash-flow budget, which is a statement of the estimated cash receipts and expenditures over a specified period of time. It is typical for a firm to prepare both types of budgets by first computing an operating budget and then constructing a cash budget based on the operating budget. A third common type of budget is the capital budget, which is used to plan expenditures on assets whose returns are expected to last beyond one year. This section examines all three of these budgets: operating, cash flow and capital. Then the preparation of pro forma financial statements from these budgets is discussed.

THE OPERATING BUDGET The operating budget is made up of a variety of forecasts, including sales forecasts, expense forecasts, production forecasts and operating forecasts.

Sales forecasts Typically, the first step in creating an operating budget is the preparation of the sales forecast.10 An entrepreneur can prepare the sales forecast in several ways. One way is to implement a statistical forecasting technique such as simple linear regression. Simple linear regression is a method of estimating the expected value of one variable y given the values of some other variable or variables x. ‘Linear’ refers to the assumption that a linear relationship (straight line) exists between Y and x: Y ¼ a þ bx Y is a dependent variable (it is dependent on the values of a, b and x), x is an independent variable (it is not dependent on any of the other variables), a is a constant (in regression analysis, Y is dependent on the variable x, all other things held constant) and b is the slope of the line (the change in Y divided by the change in x). For estimating sales, for instance, Y is the variable used to represent the expected sales and x is the variable used to represent some factor on which sales might be dependent (such as advertising expenditures or foot traffic past the store). When using regression analysis, the entrepreneur draws conclusions about the relationship between, for example, product sales and advertising expenditures. Here is an example of how Hanna Frederick, Ma´mor’s managing director, used regression analysis.

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Hanna began with two initial assumptions: (1) If no money is spent on advertising, total sales will be $200 000 and (2) for every dollar spent on advertising, sales will be increased by two times that amount. Relating these two observations yields the following simple linear regression formula: S ¼ $200 000 þ 2A where: S ¼ Sales (projected) A ¼ Advertising expenditures [Note: It is often easier to substitute more meaningful letters into an equation. In this case, the letter S was substituted for the letter Y simply because the word ‘sales’ starts with that letter. The same is true for the letter A for advertising, which was substituted for the letter x.] In order to determine the expected sales level, Hanna must insert different advertising expenditures and complete the simple linear regression formula for each different expenditure. The following data and Figure 15.1 demonstrate the results. Projected Sales ($000)

FIGURE 15.1 REGRESSION ANALYSIS

800 700 600 500 400 300 50

100

150

200

250

300

Advertising Expenditures ($000) Simple Linear Regression ($000) A $ 50 100 105 200 205 300

2A $100 200 300 400 500 600

S

$200

2A

$300 400 500 600 700 800

Another commonly used technique for the preparation of a sales forecast is the estimation that current sales will increase by a certain percentage over the prior period’s sales. This percentage is based on a trend line analysis that usually covers the five preceding sales periods and assumes that the seasonal variations will continue to run in the same pattern. Obviously, because it needs five preceding sales periods, trend line analysis is used for established ventures, but it could also draw upon industry data as a benchmark for the new venture’s growth.

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Here is an example of how Ma´mor used trend line analysis to forecast sales: After considerable analysis of the company’s and the industry’s sales history, Hanna decided to use trend line analysis and estimated that sales would increase five per cent during the next year, with the seasonal variations following roughly the same pattern. Since she has a personal computer with an electronic spreadsheet program, such as Microsoft Excel, Hanna chose to use the input of last year’s sales figures in the spreadsheet and to instruct the computer to increase each month by 5 per cent. The results are shown in Table 15.5. ´ MOR’S SALES FORECASTS FOR 2014 ($000) MA

TABLE 15.5

JANUARY

Sales 3 1.05

FEBRUARY

3 1.05

APRIL

MAY

JUNE

$300

$350

$400

$375

$500

$450

315

368

420

394

525

473

JULY

Sales

MARCH

AUGUST

SEPTEMBER

OCTOBER

NOVEMBER

DECEMBER

$475

$480

$440

$490

$510

$550

499

504

462

515

536

578

Expense (purchase) forecasts After a business has forecast its sales for the budget period, expenses must be estimated. The first type of expense that should be estimated is the cost of goods sold (cogs), which follows sales on the income statement. For retail firms this is a matter of projecting purchases and the corresponding beginning and desired ending inventories. Many firms prefer to have a certain percentage of the next month’s sales on hand in inventory. Here is how Hanna determines her company’s expected purchases and inventory requirements: For determining the purchase requirements, Hanna believes her gross profit will represent 15 per cent of her sales dollar. This is based on analysis of the past five years’ income statements. Consequently, cost of goods sold will represent 85 per cent of the sales for the current month. In addition, Hanna wants to have approximately one week’s inventory on hand. Thus the ending inventory is estimated to be 25 per cent of next month’s sales. The results are shown in Table 15.6.

Operating expenses The last step in preparing the operating budget is to estimate the operating expenses for the period. Three of the key concepts in developing an expense budget are fixed, variable and mixed costs. A fixed cost is one that does not change in response to changes in activity for a given period of time. Rent, depreciation and certain salaries are examples. A variable cost is one that changes in the same direction as, and in direct proportion to, changes in operating activity. Shipping supplies and sales commissions are examples. Mixed costs are a blend of fixed and variable costs. An example is utilities, since part of this expense would be responsive to changes in activity and the rest would be a fixed expense, remaining relatively stable over the budget period. Mixed costs can present a problem for management in that it is sometimes difficult to determine how much of the expense is variable and how much is fixed.

Chapter 15: Measuring performance for entrepreneurial ventures 555

TABLE 15.6

´ MOR’S PURCHASE REQUIREMENTS BUDGET FOR 2014 ($000) MA JAN.

Sales revenue

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

$315

$368

$420

$394

$525

$473

$499

$504

$462

$515

$536

$578

Beginning inventory

$ 67

$ 78

$ 89

$ 84

$112

$101

$106

$107

$ 98

$109

$114

$123

Purchases

$263

$305

$331

$341

$410

$383

$400

$395

$380

$416

$437

$413

Cost of goods available

$326

$379

$415

$420

$515

$478

$500

$495

$472

$519

$544

$528

Ending inventory

$ 78

$ 89

$ 84

$112

$101

$106

$107

$ 98

$109

$114

$123

$ 66

Cost of goods sold

$268

$313

$357

$335

$446

$402

$424

$428

$393

$438

$456

$491

Gross profit

$ 63

$ 74

$ 84

$ 79

$105

$ 95

$100

$101

$ 92

$103

$108

$116

Cost of goods sold calculation

Assumptions:

Beginning inventory ¼ Prior month’s ending inventory or current month’s sales 3 ((.85) 3 (.25)) Purchases ¼ Cost of goods available  Beginning inventory Cost of goods available ¼ Cost of goods sold þ Ending inventory Ending inventory þ Next month’s sales 3 (0.85)(0.25) (since inventory is carried at cost) Cost of goods sold ¼ Current period sales 3 (0.85) Gross profit ¼ Sales  Cost of goods sold

After the expenses have been budgeted, the sales, cost of goods and expense budget are combined to form the operating budget. Table 15.7 outlines Ma´mor’s anticipated expenses for the budget year and the completed operating budget for the period. Each month represents the pro forma, or projected, income and expenses for that period. TABLE 15.7

´ MOR’S OPERATING EXPENSE BUDGET FOR 2014 (000’s) MA

In order to identify the behaviour of the different expense accounts, Ma´mor decided to analyse the past five years’ income statements. Following are the results of the analysis: • • • • • •

Rent is a constant expense and is expected to remain the same over the next year. Payroll expense for sales personnel changes in proportion to sales, since the more sales the store has, the more people it must hire to meet increased consumer demands. Utilities are expected to remain relatively constant over the budget period. This is because the food coolers will be running at the same level even though the sales levels may vary. Taxes are based primarily on sales and payroll and are therefore considered a variable expense. Supplies will vary in proportion to sales. This is because most of the supplies (cash register tape, packaging, etc.) will be used to support sales. Repairs are relatively stable and are a fixed expense. Hanna has maintenance contracts on the equipment in the store and the cost is not scheduled to rise during the budget period. JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Operating expenses Rent

$ 2

$ 2

$ 2

$ 2

$ 2

$ 2

$ 2

$ 2

$ 2

$ 2

$ 2

$

2

Payroll

32

37

42

39

53

47

50

50

46

51

54

58

Utilities

5

5

5

5

5

5

5

5

5

5

5

5

556 Part 4: Growth strategies for entrepreneurial ventures

TABLE 15.7

´ MOR’S OPERATING EXPENSE BUDGET FOR 2014 (000’s) (Continued ) MA JAN.

Taxes

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

3

4

4

4

5

5

5

5

5

5

5

6

Supplies

16

18

21

20

26

24

25

25

23

26

27

29

Repairs

2

2

2

2

2

2

2

2

2

2

2

2

$60

$68

$76

$72

$93

$85

$89

$89

$83

$91

$95

$102

Total expenses

THE CASH-FLOW BUDGET After the operating budget has been prepared the entrepreneur can proceed to the next phase of the budget process, the cash-flow budget. This budget, which is often prepared with the assistance of an accountant, provides an overview of the cash inflows and outflows during the period. By pinpointing cash problems in advance, management can make the necessary financing arrangements.11 The first step in the preparation of the cash-flow budget is the identification and timing of cash inflows. For the typical business, cash inflows will come from three sources: (1) cash sales, (2) cash payments received on account and (3) loan proceeds. Not all of a firm’s sales revenues are cash. In an effort to increase sales, most businesses will allow some customers to purchase goods on account. Consequently, part of the funds will arrive in later periods and will be identified as cash payments received on account. Loan proceeds represent another form of cash inflow that is not directly tied to the sales revenues. A firm may receive loan proceeds for several reasons – for example, the planned expansion of the firm (new building and equipment) or meeting forecasted cash-flow needs stemming from growth. During times of high growth the rate of expenses related to forecast sales can exceed the rate of revenue from current sales which leaves a working capital gap and subsequently a need to fund the forecast cash-flow shortfall. If a firm becomes unable to pay debts as and when they fall due, the firm is said to be an insolvent trader; an illegal position for which proprietors and directors can be prosecuted. Some businesses have a desired minimum balance of cash indicated on the cash-flow budget, highlighting the point at which it will be necessary to seek additional financing. Table 15.8 provides an example of how Ma´mor prepared its cash-flow budget. TABLE 15.8

´ MOR’S CASH-FLOW BUDGET MA

Ma´mor’s Hanna Frederick has successfully completed her operating budget and is now ready to prepare her cash-flow worksheet. After analysing the sales figures and the cash receipts, Hanna has determined that 80 per cent of monthly sales are in cash. Of the remaining 20 per cent, 15 per cent is collected in the next month and the final 5 per cent is collected in the month following (see the sales forecast worksheet in Table 15.5). Hanna’s purchases are typically paid during the week following the purchase. Therefore, approximately one-fourth of the purchases are paid for in the following month. Rent expense is paid a month in advance. However, since it is not expected to go up during the budget period, the monthly cash outlay for rent remains the same. All the other expenses are paid in the month of consumption (see the operating expense budget in Table 15.7). Finally, the cash-flow worksheet is constructed by taking the beginning cash balance, adding the cash receipts for that month and deducting the cash disbursements for the same month. ´ MOR’S CASH RECEIPTS WORKSHEET FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Sales

$315

$368

$420

$394

$525

$473

$499

$504

$462

$515

$536

$578

Current month

$252

$294

$336

$315

$420

$378

$399

$403

$370

$412

$428

$462

Prior month

$ 82

$ 47

$ 55

$ 63

$ 59

$ 79

$ 71

$ 75

$ 76

$ 69

$ 77

$ 80

Chapter 15: Measuring performance for entrepreneurial ventures 557

TABLE 15.8

´ MOR’S CASH-FLOW BUDGET (Continued ) MA ´ MOR’S CASH RECEIPTS WORKSHEET FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Two months ago

$ 26

$ 28

$ 16

$ 18

$ 21

$ 19

$ 26

$ 24

$ 24

$ 25

$ 24

$ 26

Cash receipts

$360

$369

$407

$396

$500

$476

$496

$502

$470

$506

$529

$568

´ MOR’S CASH DISBURSEMENTS WORKSHEET FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Purchases

$263

$305

$331

$341

$410

$383

$400

$395

$380

$416

$437

$413

Current month

$197

$228

$248

$256

$307

$287

$300

$296

$285

$312

$328

$309

Prior month

$ 98

$ 66

$ 76

$ 83

$ 85

$102

$ 96

$100

$ 99

$ 95

$104

$109

Purchase payments

$295

$294

$324

$339

$392

$396

$396

$396

$384

$407

$432

$419

Operating expenses

$ 60

$ 68

$ 76

$ 72

$ 93

$ 85

$ 89

$ 89

$ 83

$ 91

$ 95

$102

Cash payments

$355

$362

$400

$412

$485

$481

$485

$485

$467

$498

$527

$521

´ MOR’S CASH-FLOW WORKSHEET FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Beginning cash

$122

$127

$134

$141

$127

$141

$143

$154

$170

$173

$181

$184

Add: Receipts

$360

$369

$407

$396

$500

$476

$496

$502

$470

$506

$529

$568

Cash available

$482

$496

$541

$537

$627

$617

$639

$656

$640

$679

$710

$752

Less: Payments

$355

$362

$400

$411

$485

$481

$485

$485

$467

$498

$527

$521

Ending cash

$127

$134

$141

$126

$142

$136

$154

$171

$173

$181

$183

$231

CHARACTERISTICS OF CREDIBLE FINANCIALS Although every section of a business plan has its purpose, the financial section bears the most scrutiny. The financial statements of a business are deserving of this attention for two reasons: (1) the management team has significant discretion in how the financials are constructed and (2) potential investors reviewing a business plan will be interested in the financial viability of the company’s strategy. Following are the characteristics that convincing financial statements have in common. •

•

ENTREPRENEURSHIP IN PRACTICE

Holistic. An income statement tells only part of the financial story of your business; the balance sheet and cash-flow statement are necessary to fill in the remaining details. Investors and lenders are interested in every detail of your company’s financial health, so never exclude relevant information, such as the amount of and the timeline for the cash you will need. Precise. Although investors will carefully analyse your financial statements, helping them to pinpoint the important details will ensure that they do not lose patience searching through your plan. To aid the readers of your plan, focus your sales and cost of goods sold numbers on major product lines. In addition, pay attention to how you label your line items to ensure that your readers will understand what you are trying to communicate. For instance, ‘costs’ are cont.

»

558 Part 4: Growth strategies for entrepreneurial ventures cont.

•

•

•

what you pay for what you are selling, while ‘expenses’, like payroll and rent, are overhead charges you would have without sales. Realistic. When you tailor your figures to achieve a predetermined revenue goal, you will have trouble justifying your numbers when questioned. Instead, build your financials by starting with your costs and sales in your local market to anchor your figures in reality. In addition, your projections beyond the first year should be annual or quarterly. Simple. Significant volatility in your industry should be noted, such as your business being impacted by seasonality; however, bogging down your plan with lengthy explanations regarding the probability of your projections will only serve to confuse the reader. Including clarifying statements, such as ‘most likely’, and supporting addendums, such as your break-even analysis, will be sufficient. Accurate. Investors know that your plan will change repeatedly as you build your business; however, overlooking simple expenses, such as interest payments, can cast doubt on your attention to detail. Once you have your financial statements completed, verifying the finer points, such as the accuracy of the interest and tax rates, will show that you are able to take your business from plan to implementation. Sources: Adapted from Berry, T. (2007), The facts about financial projections, May, http://www.entrepreneur.com/startingabusiness/ businessplans/businessplancoachtimberry/article178210.html; Casparie, J. (2006), Realistic projections that attract investors, April, http://www.entrepreneur.com/money/financing/raisingmoneycoachjimcasparie/article159516.html; ‘5 Tips for Coming Up with Financial Projections for Your Business Plan’, National Federation of Independent Business, ª 2012.

PRO FORMA STATEMENTS The final step in the budget process is the preparation of pro forma statements, which are projections of a firm’s future financial statements. Pro forma comes from Latin meaning ‘according to form’. In the normal accounting cycle, the income statement is prepared first and then the balance sheet. Similarly, in the preparation of pro forma statements, the pro forma income statement is followed by the pro forma balance sheet. In the process of preparing the operating budget, the firm will have already prepared the pro forma income statements for each month in the budget period. Each month presents the anticipated income and expense for that particular period, which is what the monthly pro forma income statements do. In order to prepare an annual pro forma income statement, the firm combines all months of the year. The process for preparing a pro forma balance sheet is more complex. The last balance sheet prepared before the budget period began, the operating budget and the cash-flow budget are all needed in preparing a pro forma balance sheet. Starting with the beginning balance sheet balances, the projected changes as depicted on the budgets are added to create the projected balance sheet totals. After preparing the pro forma balance sheet, the entrepreneur should verify the accuracy of their work with the application of the traditional accounting equation: Assets ¼ Liabilities þ Shareholders’ equity If the equation is not in balance, the work should be rechecked. Table 15.9 provides a brief account of the process of preparing pro forma financial statements for Ma´mor Chocolates Ltd.

SENSITIVITY ANALYSIS One last thing an entrepreneur should do is conduct a sensitivity analysis or a ‘what if’ analysis. This can be done using spreadsheets and the integrated set of pro forma accounts including the balance sheet, income and cash statements. This analysis checks to see to what extent under- or overestimated assumptions may influence cash needs and profitability and the financial strength of the business.

Chapter 15: Measuring performance for entrepreneurial ventures 559

A harsh test that may be imposed by some investors is to ask ‘what if the costs and expenses estimated by the business are doubled while the forecast revenues are halved?’ This is a form of sensitivity analysis to check to what extent the business remains viable when certain assumptions are challenged. It is far better for the entrepreneur to have already performed these tests around critical assumptions before an investor runs the numbers. Knowing the implications of changing assumptions will forearm the entrepreneur with answers to difficult investor questions and in practice will provide insight on key metrics to monitor that will raise red flags if some predetermined limits are hit. TABLE 15.9

´ MOR CHOCOLATES: PRO FORMA STATEMENTS MA

At this point in the budget process, Ma´mor’s Hanna Frederick has the information necessary to prepare pro forma financial statements. The first set she has decided to prepare are the pro forma income statements. To do this, Hanna simply copies the information from the operating budget (see the comparative income statements below and compare with the operating budget). The next set of pro forma statements is the pro forma balance sheets. In order to compile these, she uses the following information along with the operating budget and the cash-flow worksheet she has prepared: • • • • • • • •

cash – the ending cash balance for each month from the cash-flow worksheet accounts receivable – 20 per cent of the current month’s sales plus 5 per cent of the preceding month’s sales inventory – the current month’s ending inventory on the pro forma income statements prepaid rent – the $2000 is expected to remain constant throughout the budget period and is always paid one month in advance building and equipment – no new acquisitions are expected in this area, so the amount will remain constant accumulated depreciation – in the interest of simplicity, we assume this will stay the same; all buildings and equipment are fully depreciated accounts payable – 25 per cent of current purchases capital – prior month’s capital balance plus current month’s net income. (No dividend payments are anticipated.) ´ MOR’S COMPARATIVE PRO FORMA INCOME STATEMENTS FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Sales

$315

$388

$420

$394

$525

$473

$499

$504

$462

$515

$536

$578

Cost of goods sold

$252

$294

$336

$315

$420

$378

$399

$403

$370

$412

$428

$462

Gross profit

$ 63

$ 74

$ 84

$ 79

$105

$ 95

$100

$101

$ 92

$103

$108

$116

Total operating expenses

$ 60

$ 68

$ 76

$ 72

$ 93

$ 85

$ 89

$ 89

$ 83

$ 91

$ 95

$102

Net profit

$

$ 6

$ 8

$

$ 12

$ 10

$ 11

$ 12

$

$ 12

$ 12

$ 14

3

7

9

´ MOR CHOCOLATES COMPARATIVE PRO FORMA BALANCE STATEMENTS FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Assets Cash

$127

$134

$141

$126

$142

$136

$154

$171

$173

$181

$183

$231

Accounts receivable

91

89

102

100

125

121

123

126

117

126

133

142

Inventory

74

84

79

105

95

100

101

92

103

107

116

66

Prepaid rent

2

2

2

2

2

2

2

2

2

2

2

2

Building and equipment

350

350

350

350

350

350

350

350

350

350

350

350

560 Part 4: Growth strategies for entrepreneurial ventures

TABLE 15.9

´ MOR CHOCOLATES: PRO FORMA STATEMENTS (Continued ) MA ´ MOR CHOCOLATES COMPARATIVE PRO FORMA BALANCE STATEMENTS FOR 2014 ($000) MA JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Less: Accumulated depreciation

350

350

350

350

350

350

350

350

350

350

350

 350

Total assets

$294

$309

$324

$333

$364

$359

$380

$391

$395

$416

$434

$441

$ 66

$ 76

$ 83

$ 85

$102

$ 96

$100

$ 99

$ 95

$104

$109

$103

228

234

242

249

261

270

280

292

300

312

326

339

$294

$310

$325

$334

$363

$366

$380

$391

$395

$416

$435

$442

Liabilities Accounts payable Capital Total liabilities and equity

CAPITAL BUDGETING Entrepreneurs are usually required to make several investment decisions (that is, decisions to acquire assets with a life longer than one year) in the process of managing their businesses. These are commonly referred to as capital investments or capital expenditures (commonly referred to as ‘capex’). A technique the entrepreneur can use to help plan for capital expenditures is capital budgeting.12 The first step in capital budgeting is to identify the cash flows related to a proposed investment and their timing. The inflows – or returns as they are commonly called – are equal to net operating income before deduction of payments to the financing sources but after the deduction of applicable taxes and with depreciation added back, as represented by the following formula: Expected returns ¼ X (1 – T) þ Depreciation X is equal to the net operating income and T is defined as the appropriate tax rate. An illustration follows. Hanna Frederick is faced with a dilemma. She has two mutually exclusive projects, both of which require an outlay of $1000. The problem is that she can afford only one of the projects. After discussing the problem with her accountant, Hanna discovered that the first step she needs to take is to determine the expected return on each project. In order to gather this information, she has studied the probable effect on the store’s operations and has developed the data shown in Table 15.10.

Table 15.10 provides a good illustration of the expected returns for Hanna’s two projects. At this point, however, the cash inflows of each year are shown without consideration of the time value of money (the idea that money available today has an earning potential in terms of interest and therefore will be worth more over a given time period). The cash outflow is used to refer to the initial cash outlay that must be made in the beginning (the purchase price). When gathering data to estimate the cash flows over the life of a project, it is imperative to obtain reliable estimates of the savings and expenses associated with the project.

Chapter 15: Measuring performance for entrepreneurial ventures 561

TABLE 15.10

´ MOR’S EXPECTED RETURN WORKSHEET MA PROPOSAL A

YEAR

X

(1 – T), WHERE (T ¼ .40)

X(1 – T)

DEPRECIATION

X(1 – T) þ DEPRECIATION

1

$500

$0.60

$300

$200

$500

2

333

0.60

200

200

400

3

167

0.60

100

200

300

4

300

0.60

180

200

20

5

317

0.60

190

200

10

PROPOSAL B (1  T) YEAR

X

(1 – T), WHERE (T ¼ .40)

X(1 – T)

DEPRECIATION

X(1 – T) þ DEPRECIATION

1

$167

$0.60

$100

$200

$100

2

0

0.60

100

200

200

3

167

0.60

100

200

300

4

333

0.60

200

200

400

5

500

0.60

300

200

500

Assumptions: X ¼ Anticipated change in net income T ¼ Applicable tax rate (.40) Depreciation ¼ Depreciation (computed on a straight-line basis) ¼ Cost/Life ¼ 1000/5

The principal objective of capital budgeting is to maximise the value of the company. It is designed to answer two basic questions: 1 Which of several mutually exclusive projects should be selected? (Mutually exclusive projects are alternative methods of doing the same job. If one method is chosen, the other methods will not be required.) 2 How many projects, in total, should be selected?13 The three most common methods used in capital budgeting that can take into account the time value of money are the payback method, the net present value (NPV) method and the internal rate of return (IRR) method. Each has certain advantages and disadvantages. In this section, the same proposal will be examined under each method to more clearly illustrate each technique.

PAYBACK One of the easiest capital-budgeting techniques to understand is the payback method or, as it is sometimes called, the payback period. In this method the length of time required to ‘pay back’ the original investment is the determining criterion. The entrepreneur will select a maximum timeframe for the payback period. Any project that requires a longer period will be rejected and

562 Part 4: Growth strategies for entrepreneurial ventures

projects that fall within the timeframe will be accepted. Here is an example of the payback method used by Ma´mor: Hanna has a decision to make. She would like to purchase a new cash register for her store but is unsure which of two proposals to accept. Each machine costs $1000. An analysis of the projected returns reveals the following information: YEAR

PROPOSAL A

PROPOSAL B

1

$500

$100

2

$400

$200

3

$300

$300

4

$ 20

$400

5

$ 10

$500

After careful consideration, Hanna decides to use the payback method with a cut-off period of three years. In this case she discovers that Proposal A would pay back her investment in two and one-third years; $900 of the original investment will be paid back in the first two years and the last $100 in the third year. Proposal B, on the other hand, will require four years for its payback. Using the decision criterion of the shorter payback period, Hanna chooses Proposal A and rejects Proposal B.

One of the problems with the payback method is that it ignores cash flows beyond the payback period. Therefore, it is possible that the project chosen will be less profitable over its total life than the alternative. Nevertheless, many companies, particularly entrepreneurial firms, continue to use this method for several reasons: (1) it is very simple to use in comparison to other methods; (2) projects with a faster payback period normally have more favourable short-term effects on earnings; and (3) if a business is short on cash, it may prefer to use the payback method because it provides a faster return of funds.

NET PRESENT VALUE The net present value (NPV) method is a technique that helps to overcome some of the shortcomings of the payback method by recognising the future cash flows beyond the payback period. The concept works on the premise that a dollar today is worth more than a dollar in the future. How much more depends on the applicable cost of capital for the firm. The cost of capital is the rate used to adjust future cash flows to determine their value in present period terms. This procedure is referred to as discounting the future cash flows. The discounted cash value is determined by the present value of the cash flow.

THE INDIAN ENTREPRENEUR AND THE CUNNING NPV

ENTREPRENEURIAL EDGE

An Indian business entrepreneur ran a small warehouse and a van for hire delivering raw material to a factory 20 kilometres away. His vehicle was reasonably new but to save money he had hired an old driver with defective vision who was working for half the salary of a regular driver. The driver could do only four trips a day covering 80 kilometres. When he calculated his profits, the entrepreneur realised this income was not adequate for his survival and for his son’s university education. He could not even maintain his vehicle properly and it was frequently breaking down. To make ends meet he thought he had to sell the

cont.

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Chapter 15: Measuring performance for entrepreneurial ventures 563

cont.

delivery business, fire the driver, sell off his vehicle, pay his son’s university entrance fees and maintain his family by selling his wife’s jewels and silver. What price should he ask for the business? He decided he would take the earnings for the next few years, subtract the cost of running the vehicle and calculate the net present value (NPV) by discounting each year’s earnings at around 10 per cent. Or was there another solution? Ever the entrepreneur, he came up with a cunning plan. After some thought he decided to fire his ageing driver and generously gave him a month’s leave. He got the van tuned and repaired for better petrol consumption. Then he hired a competent driver at the full going rate and sent him on eight trips a day doing 160 kilometres of deliveries. After a fortnight he realised his earnings had gone up by two to three times because of more trips and fewer breakdowns. The service, the product and the vehicle were all the same, but were operated differently. He worked out NPV on the basis of the new earnings but with the same discount rate as before. The value was now three times higher. If he had sold it on his earlier calculations, some clever buyer would have got a bargain and benefited from the entrepreneur’s first faulty calculation. Now with an efficient going concern he could sell the delivery service and the vehicle at the higher price based on the new NPV. He was able to pay for his son’s education and also pay off some of his past debts. Source: Adapted from ‘How to polish & sell family silver’, Financial Express (Mumbai), 29 August 2002. Published by The Indian Express ltd., ª 2002.

To use this approach, the entrepreneur must find the present value of the expected net cash flows of the investment, discounted at the appropriate cost of capital and subtract from it the initial cost outlay of the project. The result is the net present value of the proposed project. Many financial accounting and finance textbooks have tables (called present value tables) that list the appropriate discount factors to multiply by the future cash flow to determine the present value. In addition, financial calculators are available that will compute the present value given the cost of capital, future cash flow and the year of the cash flow. Finally, given the appropriate data, electronic spreadsheet programs can be used to determine the present value. After the net present value has been calculated for all of the proposals, the entrepreneur can select the project with the highest net present value. Here is an example of the net present value method used by Ma´mor Chocolates: Not really satisfied with the results she has obtained from the payback method, Hanna has decided to use the NPV method to see what result it would produce. After conferring with her accountant, Hanna learned that the cost of capital for her firm is 11 per cent. She then prepares the information contained in Table 15.11. TABLE 15.11

´ MOR’S NET PRESENT VALUE MA PROPOSAL A

YEAR

CASH FLOW

DISCOUNT FACTOR

PRESENT VALUE

1

$500

0.9091

$ 454.55

2

400

0.8264

330.56

3

300

0.7513

225.39

4

20

0.6830

13.66

5

10

0.6209

6.21 $1030.37

Less: Initial outlay

1000.00

Net present value

$ 30.37

564 Part 4: Growth strategies for entrepreneurial ventures

TABLE 15.11

´ MOR’S NET PRESENT VALUE (Continued ) MA PROPOSAL B

YEAR

CASH FLOW

DISCOUNT FACTOR

PRESENT VALUE

1

$100

0.9091

$ 90.91

2

200

0.8264

165.28

3

300

0.7513

225.39

4

400

0.6830

273.20

5

500

0.6209

310.45 $1065.23

Less: Initial outlay

1000.00

Net present value

$ 65.23

Since Proposal B has the higher net present value, Hanna selected Proposal B and rejected Proposal A.

INTERNAL RATE OF RETURN The internal rate of return (IRR) method is similar to the net present value method in that the future cash flows are discounted. However, they are discounted at a rate that makes the net present value of the project equal to zero. This rate is referred to as the internal rate of return of the project. The project with the highest internal rate of return is then selected. One of the major drawbacks to the use of the IRR method is the difficulty that can be encountered when using the technique. Using the NPV method it is quite simple to look up the appropriate discount factors in the present value tables. When using the IRR concept, however, the entrepreneur must begin with a net present value of zero and work backward through the tables. This means that the entrepreneur must estimate the approximate rate and eventually try to track the actual internal rate of return for the project. Although this may not seem too difficult for projects with even cash flows (that is, cash flows that are fairly equal over the business periods), projects with uneven cash flows (fluctuating periods of cash inflow and cash outflow) can be a nightmare. Unfortunately, reality dictates that most projects will probably have uneven cash flows. Fortunately, electronic calculators and spreadsheet programs are available that can determine the actual internal rate of return given the cash flows, initial cash outlays and appropriate cash-flow periods. Here is an example of the internal rate of return method used by Ma´mor Chocolates: Having obtained different results from the payback period and the net present value method, Hanna is confused about which alternative to select. To alleviate this confusion, she has decided to use the internal rate of return to evaluate the two proposals and has decided that the project with the higher internal rate of return will be selected. Accordingly, she has prepared the following tables with the help of her calculator:

Chapter 15: Measuring performance for entrepreneurial ventures 565

PROPOSAL A (11.73% IRR) YEAR

CASH FLOW

DISCOUNT FACTOR

PRESENT VALUE

1

$500

0.8942

$ 447.11

2

400

0.7996

319.84

3

300

0.7151

214.53

4

20

0.6394

12.80

5

10

0.5718

5.73 $1000.00

Less: Initial outlay

1000.00

Net present value

$

0.00

PROPOSAL B (12.01% IRR) YEAR

CASH FLOW

DISCOUNT FACTOR

PRESENT VALUE

1

$100

0.8928

$

89.27

2

200

0.7971

159.42

3

300

0.7117

213.51

4

400

0.6354

254.15

5

500

0.5673

283.65 $1000.00

Less: Initial outlay

1000.00

Net present value

$

0.00

Proposal B is selected because it has the higher internal rate of return. This conclusion supports the statement that the project with the higher net present value will also have the higher internal rate of return.

The Ma´mor Chocolates examples illustrate the use of all three capital-budgeting methods. Even though Proposal A showed great value by the first method (payback), under the other two methods (net present value and internal rate of return) Proposal B surfaced as the better proposal. It is important for entrepreneurs to understand all three methods and to use the one that best fits their needs. If payback had been Hanna’s only consideration, then Proposal A would have been selected. When future cash flows beyond payback are to be considered, the net present value and the internal rate of return are the methods to determine the best proposal. The budgeting concepts discussed so far are extremely powerful planning tools. But how can entrepreneurs monitor their progress during the budget period? How can they use the information accumulated during the course of the business to help plan for future periods? Can this information be used for pricing decisions? The answer to the third question is ‘yes’, and the rest are answered in the following sections.

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WHEN CURRENCY LOSES ITS GLOBAL VALUE A nation’s currency is the bedrock on which its wealth is built. Without it, citizens would be left to barter for products and services. Currency is not inherently valuable. Its worth stems from the faith of the nation’s citizens in their government’s ability to back its currency. As global commerce has become more prevalent, entrepreneurs have been forced to IN PRACTICE understand the pitfalls and the possibilities of national borders giving way to open trade. One of the repercussions has been the increased volatility of national currency caused by international forces. The fluctuation in the value of the US dollar is an example of this phenomenon. The dollar has historically been the world’s reserve currency, driving the global economy. Because American consumers have been unable to quench their insatiable hunger for foreign goods, more foreigners are in possession of dollars – which in and of itself is not bad; however, when their faith in the US economy falters they are inclined to offload dollars in order to hedge against the risk of inflation, which, of course, is self-fulfilling. What are entrepreneurs to do when the value of their national currency falls? Ironically, some entrepreneurs can benefit from the situation, at least initially. When a country’s currency loses value, revenue generated through tourism tends to increase due to foreigners travelling to the country in order to take advantage of the improved conversion rates. Most business owners are quick to ignore the implications of such a shift as their business prospects improve; however, when foreign companies move from buying products to buying the manufacturers, the national landscape can morph in unpredictable ways. Start-up ventures often have little recourse when their country’s currency begins to lose value. While large corporations hedge their bets by converting their capital to foreign currency or by making direct foreign investments, small businesses are left to make the best of a bad situation. Diversifying a company’s customer base to include international consumers is one way to help mitigate the risk, but in the end the factors at play are outside of the control of even the largest companies.

ENTREPRENEURSHIP

Source: Adapted from Colvin, G. (2007), ‘What’s sinking the dollar?’, Fortune, 13 November, http://money.cnn.com/magazines/fortune/ fortune_archive/2007/11/26/101232904/index.htm?postversion_2007111309. Published by Time Inc., ª 2007.

BREAK-EVEN ANALYSIS In today’s competitive marketplace, entrepreneurs need relevant, timely and accurate information that will enable them to price their products and services competitively and yet be able to earn a fair profit. Break-even analysis supplies this information. After reviewing this section you can also practise your skills with the Experiencing Entrepreneurship exercise ‘The project proposal’ at the end of this chapter.

BREAK-EVEN POINT COMPUTATION Break-even analysis is a technique commonly used to assess expected product profitability. It helps determine how many units must be sold in order to break even at a particular selling price.

Contribution margin approach A common approach to break-even analysis is the contribution margin approach. The contribution margin is the difference between the selling price and the variable cost per unit. It is the amount per unit that is contributed to cover all other costs.14 With this information, the entrepreneur can decide whether to add or drop a product line, how to price a product or service and how to structure sales commissions or bonuses. It starts by grouping together a business’s fixed and variable costs.

Chapter 15: Measuring performance for entrepreneurial ventures 567

Ma´mor’s Hanna Frederick wants to know for every dollar of sales, after the costs that were directly related to the sales were subtracted, how much remained to contribute towards paying for the direct costs and for profit. Here’s an example of an income statement formatted to calculate the contribution margin (see Table 15.12): TABLE 15.12

´ MOR’S CONTRIBUTION MARGIN INCOME STATEMENT FOR 2014 ($000) MA

Sales

$463

Less: Variable costs Cost of goods sold

$231

Sales commissions

$ 59

Delivery charges

$ 14

Total variable costs

$304

Contribution margin (34%)

$159

Less: Fixed costs Advertising

$ 2

Depreciation

$ 13

Insurance

$ 5

Payroll taxes

$ 8

Rent

$ 10

Utilities

$ 18

Wages

$ 40

Total fixed costs

$ 96

Net operating income

$ 63

Since the break-even point occurs where income equals expenses, the contribution margin approach formula is: 0 ¼ (SP  VC)S  FC or FC ¼ (SP  VC)S where: SP ¼ Unit selling price VC ¼ Variable costs per unit S ¼ Sales in units FC ¼ Fixed cost Hanna’s contribution margin for the year was 34 per cent. This means that, for every dollar of sales, after the costs that were directly related to the sales were subtracted, 34 cents remained to contribute towards paying for the direct costs and for profit. This model also can be used for profit planning by including the desired profit as part of the fixed cost.

568 Part 4: Growth strategies for entrepreneurial ventures

Handling questionable costs Although the contribution margin approach is adequate for situations in which costs can be broken down into fixed and variable components, some companies have expenses that are difficult to assign. For example, are repairs and maintenance expenses fixed or variable expenses? Can companies facing this type of problem use break-even analysis for profit planning? The answer is ‘yes’, thanks to a new technique designed specifically for entrepreneurial firms. This technique calculates break-even points under alternative assumptions of fixed or variable costs to see if a product’s profitability is sensitive to cost behaviour. The decision rules for this concept are outlined below. • If expected sales exceed the higher break-even point, then the product should be profitable, regardless of the other break-even point. • If expected sales do not exceed the lower break-even point, then the product should be unprofitable. Only if expected sales are between the two break-even points is further investigation of the questionable costs’ behaviour needed.15 The concept works by substituting the cost in question (QC) first as a fixed cost and then as a variable cost. The break-even formulas presented earlier would have to be modified to determine the break-even levels under the two assumptions. Under the fixed-cost assumption, the entrepreneur would use the following equation: 0 ¼ (SP  VC)S  FC  QC To calculate the break-even point assuming QC is variable, the following equation would be used: 0 ¼ [SP  VC  (QC/U)]S  FC U is the number of units for which the questionable cost normally would be appropriate. What the entrepreneur is determining is the appropriate unit cost that should be used if the cost is a variable cost. Here is an example of how an entrepreneur could use the technique: Ma´mor’s Hanna Frederick manufactures chocolate moulds for other companies. She has decided to use break-even analysis as a profit-planning tool for her company. She believes using this technique will enable her firm to compete more effectively in the marketplace. From an analysis of the operating costs, Hanna has determined that the variable cost per unit is $9, while fixed costs are estimated to be $1200 per month. The anticipated selling price per unit is $15. She also has discovered she is unable to classify one cost as either variable or fixed. It is a $200 repair and maintenance expense allocation. This $200 is appropriate for an activity level of 400 units; therefore, if the cost were variable, it would be $0.50 per unit ($200/400). Finally, sales are projected to be 400 units during the next budget period. The first step in this process is to determine the break-even point assuming the cost in question is fixed. Consequently, Hanna would use the following equation: 0 ¼ ðSP  VCÞS  FC  QC ¼ ð15  9ÞS  1200  200 ¼ 6S  1400 1400 ¼ 6S 234 ¼ S Figure 15.2 provides a graphic illustration of the results. Notice that the final quantity was rounded up to the next unit, because a business normally will not sell part of a unit.

Chapter 15: Measuring performance for entrepreneurial ventures 569

The next step in the process is to calculate the break-even point assuming the cost in question is a variable cost. Hanna would use the following equation to ascertain the second break-even point: 0 ¼ ½SP  VC  ðQC=UÞS  FC ¼ ½15  9  ð200=400ÞS  1200 ¼ ð6  0:50ÞS  1200 1200 ¼ 5:50S 219 ¼ S Figure 15.3 presents a graphic illustration of the results. Projected costs/profits ($000)

FIGURE 15.2 ´ MOR CHOCOLATES MA FIXED-COST ASSUMPTION

8 7 Sales 6 Total cost 5 Break-even 234 units

4

Variable

3 2 $1400

Fixed

1 0 0

100

200

300 Unit sales

400

500

Projected costs/profits ($000)

FIGURE 15.3 ´ MOR CHOCOLATES MA VARIABLE-COST ASSUMPTION

8 7 Sales 6 Total cost 5 Break-even 219 units

4

Variable

3 2 $1200

Fixed 1 0 0

100

200

300 Unit sales

400

500

Now that the two possible break-even points have been established, Hanna must compare them to her projected sales. The variable-cost sales of 400 units are greater than the larger break-even point of 234 units. Therefore, the product is assumed to be profitable regardless of the cost behaviour of the repair and maintenance expense. It does not matter whether the cost is variable or fixed; the firm will still be profitable.

570 Part 4: Growth strategies for entrepreneurial ventures

FINANCIAL RATIO ANALYSIS Can you recognise these financial terms? On Coursemate Express take a look at a quick revision to see if you understand.

TABLE 15.13

Financial statements report both on a firm’s position at a point in time and on its operations over some past period. However, the real value of financial statements lies in the fact that they can be used to help predict the firm’s earnings and dividends. From an investor’s standpoint, predicting the future is what financial statement analysis is all about; from an entrepreneur’s standpoint, financial statement analysis is useful as a way to assess financial wealth, assess trends in profitability and liquidity and, most importantly, as a starting point for planning actions that will influence the course of events. An analysis of the firm’s ratios is generally the key step in a financial analysis. The ratios are designed to show relationships among financial statement accounts. For example, Firm A might have a debt of $6 250 000 and interest charges of $520 000, while Firm B might have a debt of $62 800 000 and interest charges of $5 840 000. Which company is stronger? The true burden of these debts and the companies’ ability to repay them can be ascertained: (1) by comparing each firm’s debt to its assets and (2) by comparing the interest each must pay to the income it has available for interest payment. Such comparisons are made by ratio analysis.16 Table 15.13 lists financial ratios. It has been prepared as an entrepreneur’s guide to understanding the various ratios. Note that this outline presents the ratio’s importance to owners, managers and creditors. More important than the simple calculation of formulas are the categories that explain what each ratio measures and what each ratio tells an entrepreneur.

FINANCIAL RATIOS

RATIO

FORMULA

WHAT IT MEASURES

WHAT IT TELLS YOU

Return on owner’s capital

How well is this company doing as an investment?

How well assets have been employed by management

How well has management employed company assets? Does it pay to borrow?

Operating efficiency; the ability to create sufficient profits from operating activities

Are profits high enough, given the level of sales?

Sales Average total assets

Relative efficiency in using total resources to produce output

How well are assets being used to generate sales revenue?

Net income Sales 3 Sales Total assets

Earning power on all assets; ROA ratio broken into its logical parts; turnover and margin

How well has management employed company assets?

Average accounts receivable 3365 Annual credit sales

Liquidity of receivables in terms of average number of days receivables are outstanding

Are receivables coming in too slowly?

Cost of goods sold expense Average inventory

Liquidity of inventory; the number of times it turns over per year

Is too much cash tied up in inventories?

RATIOS FOR OWNERS

Return on investment ROI

Return on assets ROA

Net income Average owner’s equity Net income Average total assets RATIOS FOR MANAGERS

Net profit margin

Asset turnover

Return on assets

Average collection period

Inventory turnover

Net income Sales

Chapter 15: Measuring performance for entrepreneurial ventures 571

TABLE 15.13

FINANCIAL RATIOS (Continued ) RATIOS TO ASSESS SHORT-TERM LIQUIDITY

Average age of payables

Working capital

Current ratio

Quick ratio

Average accounts payable 3365 Net purchases

Approximate length of time a firm takes to pay its bills for trade purchases

How quickly does a prospective customer pay its bills?

Current assets  Current liabilities

Short-term debt-paying ability

Does this customer have sufficient cash or other liquid assets to cover its short-term obligations?

Current assets Current liabilities

Short-term debt-paying ability without regard to the liquidity of current assets

Does this customer have sufficient cash or other liquid assets to cover its short-term obligations?

Cash þ Marketable securities þ Accounts receivable Current liabilities

Short-term debt-paying ability without having to rely on inventory sales

Does this customer have sufficient cash or other liquid assets to cover its short-term obligations?

LONG-TERM CREDITORS

Debt-to-equity ratio

Total debt Total equity

Amount of assets creditors provide for each dollar of assets the owners provide

Is the company’s debt load excessive?

Times interest earned

Net income þ Interest þ Taxes Interest expense

Ability to pay fixed charges for interest from operating profits

Are earnings and cash flows sufficient to cover interest payments and some principal repayments?

Cash flow to liabilities

Operating cash flow Total liabilities

Total debt coverage. General debt-paying ability

Are earnings and cash flows sufficient to cover interest payments and some principal repayments?

Ratio analysis can be applied from two directions. Vertical analysis is the application of ratio analysis to one set of financial statements. Here an analysis ‘up and down’ the statements is done to find signs of strengths and weaknesses. Horizontal analysis looks at financial statements and ratios over time. In horizontal analysis, the trends are critical: Are the numbers increasing or decreasing? Are particular components of the company’s financial position getting better or worse?17

SUSTAINABILITY PERFORMANCE MEASURES ENTREPRENEURS In addition to the financial performance measures just described, entrepreneurs can now find a variety of planning, strategy and performance tools to use in launching and evaluating new sustainable ventures. Many companies are required to disclose sustainability performance measures on their progress towards sustainable development. Here is an overview.

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LIFE CYCLE ASSESSMENT (LCA) Life-cycle costing is a method of cost account that looks at a product’s entire value chain from a cost perspective. Other types of costing generally look only at the production process, whereas life-cycle costing tracks and evaluates costing from the research and development phase of a product’s life, through to the decline and eventual conclusion of a product’s life.18 The entrepreneur inputs data and other project information at the ‘front end’ of the model, such as applicable utility tariff information, project costs, energy savings and operations and maintenance cost information as appropriate. The engine of the model then calculates a cash flow stream based on the data and information inputs, and produces economic evaluation information, such as the internal rate of return, net present value of the cash flows, simple and actual paybacks and, more importantly, debt coverage ratios. There is a variety of LCA spreadsheets downloadable from the Internet.

DESIGN FOR THE ENVIRONMENT (DFE) Designing products with sustainability in mind means being able to measure the potential impacts so that these ‘wastes’ can be ‘designed out’ at the beginning of the product’s life cycle. This could involve choosing biodegradable materials over non-biodegradable materials, using renewable energy sources in the manufacturing process and making sure the product is recyclable at the end of its useful life. Design approaches that attempt to reduce the overall environmental impact of a product, process or service have a number of business benefits: (1) the bottom line – cuts raw material and waste disposal costs; (2) innovation – encourages good design and drives innovation; (3) customer expectations – meets user needs/wants by exceeding current expectations for price, performance and quality; (4) enhanced reputation – demonstrating good environmental performance can enhance the company’s standing with shareholders, investors and other stakeholders; (5) improvements in workplace health and safety – through reduced waste and emissions; (6) increased staff morale – there is a growing awareness among staff that businesses play an important role in working towards sustainable development, which can provide a strong personal incentive to pursue DFE; and (7) environmental performance of products – reduces the environmental impact of products throughout their life cycle.

FACTOR X Factor X relates to eco-efficiency (doing more with less) as originally defined by the World Business Council for Sustainable Development. Factor 4 is doubling the output while halving the impact, or quadrupling the output for the same impact, or producing the same amount for 25 per cent of the impact. Factor 10 ranges from 10 times the output for the same impact to the same impact for 10 per cent of the output. This is associated with the concept introduced in the 1998 book, Factor 4, written by L. Hunter Lovins and Amory Lovins of the Rocky Mountain Institute, and Ernst von Weizsa¨cker, founder of the Wuppertal Institute for Climate, Environment & Energy.19 Factor 4 explained how relatively easy it was for businesses to achieve Factor 4 results (four times the efficiency of materials and energy use) with existing technologies. Continued work has now contributed Factor 5 that extends the concept and shows how a sustainable future is also economically viable.20 It has many examples of real-world projects that save money and reduce pollution simultaneously.

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EMS, ISO 14 000, CLEAN PRODUCTION The concept of an environmental management system (EMS) is connected to the implementation of ISO 14 000 standards. EMS serves as a tool to improve environmental performance and provides a systematic way of managing a company’s environmental affairs. An EMS follows a Plan-Do-CheckAct Cycle, or PDCA. The model is continuous because an EMS is a process of continual improvement in which an organisation is constantly reviewing and revising the system. ISO stands for the International Organization for Standardization, located in Geneva, Switzerland. ISO 14 000 refers to a family of voluntary standards and guidance documents to help organisations address environmental issues. Included in the family are standards for EMS, environmental and EMS auditing, environmental labelling, performance evaluation and life-cycle assessment. In 2010, the latest globally applicable Eco-Management Audit Scheme regulation (EMAS III) came into force. The scheme sets out key performance indicators (KPIs) and the scope for further improvements. The concept of Clean Production, originally developed under the Kyoto Protocol, was to help industrialised countries meet their obligations for the reduction of greenhouse gases. It involved mechanisms to assist developing countries, which had no history of producing large quantities of greenhouse gases, to avoid copying the mistakes of the past and was described as one contribution to long-term sustainable development of the recipient country. Clean Production is one of the essential components of a favourable LCA.

ENVIRONMENTAL IMPACT ASSESSMENT (EIA) An environmental impact assessment (EIA) is an assessment of the possible impact – positive or negative – that a proposed project may have on the natural environment. The purpose of the assessment is to ensure that decision makers consider the ensuing environmental impacts to decide whether to proceed with the project. There are a variety of tools under EIA: (1) the impact inventory assesses areas and indicators (economic, environmental and social); (2) the model inventory assesses whether a policy proposal can be assessed and quantified using existing models; and (3) the good practice inventory displays the stages of impact assessment, from description of the problem to stakeholder consultation.

MATERIAL FLOW ANALYSIS (MFA) Material flow analysis (MFA) (also known as substance flow analysis; SFA) is a method of analysing the flows of a material in a well-defined system. MFA is an important tool of industrial ecology, and is used to produce better understanding of the flow of materials through an industry and its connected ecosystems, to calculate indicators and to develop strategies for improving the material flow systems. Material flow analysis is the basis for a material flow management.

MET MATRIX A MET (Materials, Energy and Toxicity) Matrix is an analysis tool used to evaluate various environmental impacts of a product over its life cycle. The tool takes the form of a 333 matrix with descriptive text in each of its cells. One dimension of the matrix is composed of a qualitative input– output model that examines environmental concerns related to the product’s materials use, energy use and toxicity. The other dimension looks at the life cycle of the product through its production, use and disposal phase. The text in each cell corresponds to the intersection of two particular aspects. This means that by looking at certain cells you can examine aspects such as energy use during the production phase, or levels of toxicity that may be a concern during the disposal phase.21

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TRIPLE BOTTOM LINE PERFORMANCE MEASURES Climate change has suddenly exploded onto the agenda of financial disclosure statements around the globe. Companies are now talking about climate change both positively (touting their own progress on emissions reductions) and negatively (disclosing the ways in which climate change can hurt the bottom line). Sustainable development performance looks at three areas: people (social), planet (environment) and profits (economic). The phrase ‘triple bottom line’ was coined by John Elkington in 1994.22 It was later expanded and articulated in his 1998 book Cannibals with Forks: The Triple Bottom Line of 21st Century Business.23 In its broadest sense, the triple bottom line captures the spectrum of values that organisations must embrace – economic, environmental and social. In practical terms, the triple bottom line performance measure means expanding the traditional company reporting framework to take into account not just financial outcomes but also environmental and social performance. The triple bottom line (or ‘TBL’, ‘3BL’ or ‘People, Planet, Profit’) goes beyond financial accounting to measure the performance of a variety of values and criteria for organisational ecological and social success. One of the most important differences with financial accounting is that TBL looks at a company’s stakeholders , not just its shareholders. A stakeholder is broadly defined as someone who is influenced, either directly or indirectly, by the actions of the firm. (Some advocate that it should be any living being, including animals.) The TBL concept is made up of three intersecting circles: people, planet and profit (see Figure 15.4).24 Compare this to the ‘five capitals model’ of sustainable development (see Figure 14.1 in Chapter 14). • ‘People’ means human capital. It means treating both employees and the community fairly and usefully. TBL means that a company sees the wellbeing of all stakeholders as interdependent. That means ‘upstreaming’ the benefits to the original producer and ‘downstreaming’ the benefits to the community. Quantifying this bottom line is relatively new, problematic and often subjective. The Global Reporting Initiative (GRI) has developed guidelines to enable corporations and NGOs alike to comparably report on the social impact of a business. • ‘Planet’ refers to natural capital and it implies that a TBL firm is actively working towards sustainable environmental practices by doing as much as possible to benefit the planet and/or at the least doing no harm to the environment. A TBL seeks to tread lightly in terms of its ecological footprint; for example, in energy consumption, use of non-renewables, reduction of waste and safe disposal of toxins. TBL firms must avoid ecologically destructive practices such as relentless resource extraction without regard to sustainability. These ‘planet’ metrics are better developed than the social ones. • ‘Profit’ means financial and manufactured capital and is at the core of all commerce, but profit in this sense goes beyond individual shareholders and includes the economic benefit enjoyed by stakeholders. It is the enduring economic impact that the firm has on its broader environment. This is what separates a TBL approach from what we have discussed up until now in this chapter.

Chapter 15: Measuring performance for entrepreneurial ventures 575

FIGURE 15.4 THREE PILLARS OF SUSTAINABLE DEVELOPMENT

Planet Natural capital Viable natural environment

Sustainable natural and built environment

Sustainable economic development Sustainable development

People Human capital Nurturing community

Equitable social environment

Profit Commerce and stakeholders Sufficient economy

At the centre of this approach lies sustainable development, which seeks to produce economic growth and social development while ensuring future generations’ ability to do the same by not exceeding the regenerative capacity of nature. Concrete performance measures for TBL accounting include: life-cycle analysis; gap analysis, such as eco-efficiency ratios and measures; econometric models to evaluate the relative performance of environmental programs; industrial ecology and supply chain linkages; measures of the company’s impact on global warming by tracking emissions; identifying sources of greenhouse gas and setting performance targets on reduction; and using an internal carbon dollar value in investment decision making. Well-developed indicators serve multiple purposes for business. They: • are a management tool that provides the focus for continuous improvement efforts • set expectations for systematic rather than ad hoc assessment of outcomes • guide policies and decision-making at different levels of an organisation • are practical tools and reproducible • strengthen public accountability by addressing the needs and expectations of external stakeholders.25 The Global Reporting Initiative has published the most comprehensive set of triple bottom line (TBL) indicators from which entrepreneurs can select the most relevant for their business.26 Table 15.14 provides a number of reference websites that are useful for an entrepreneur in choosing TBL indicators. TABLE 15.14

ORGANISATIONS DEVELOPING TRIPLE BOTTOM LINE STANDARDS AND GUIDELINES

Global Reporting Initiative Sustainability Reporting Guidelines

Guidelines from a multi-stakeholder body affiliated with the United Nations

http://www.globalreporting.org

Standards New Zealand

AS/NZS ISO 14 000 Series – Environmental management systems

http://www.standards.co.nz

Centre for Integrated Sustainability Analysis at the University of Sydney

Leading-edge research and applications for environmental and broader sustainability issues

http://www.isa.org.usyd.edu.au

Australian Department of the Environment

Reference website for Australian guidelines

http://www.environment.gov.au/ index.html

576 Part 4: Growth strategies for entrepreneurial ventures

TABLE 15.14

ORGANISATIONS DEVELOPING TRIPLE BOTTOM LINE STANDARDS AND GUIDELINES (Continued )

The Equator Principles

A collection of banks establishing principles for social and environmental assessment for the financing of projects

http://www.equator-principles.com

United Nations Global Compact

A voluntary corporate citizenship initiative aiming to advance TBL principles.

http://www.unglobalcompact.org

World Business Council for Sustainable Development (WBCSD)

A coalition of 160 international companies with a shared commitment to sustainable development, producing reports and business guides

http://www.wbcsd.org

Greenhouse Gas Protocol (GHG Protocol)

Multi-stakeholder group including NGOs and governments, co-convened by World Resources Institute (WRI) and the WBCSD

http://www.ghgprotocol.org

SIGMA Project – Sustainability – Integrated Guidelines for Management

UK-based partnership providing guidelines and toolkits for examining TBL themes

http://www.projectsigma.co.uk

Social Accountability International

SAI is a US-based, non-profit organisation developing voluntary verifiable social accountability standards

http://www.sa-intl.org

System of Environmental-Economic Accounting

The System of Environmental-Economic Accounting (SEEA) contains the internationally agreed standard concepts, definitions, classifications, accounting rules and tables for producing internationally comparable statistics on the environment and its relationship with the economy.

http://unstats.un.org/unsd/envaccounting/ seea.asp

SUSTAINABILITY PERFORMANCE MEASURES ECOLOGICAL FOOTPRINTING The ecological footprint is a measure of human demand on the Earth’s ecosystems. It compares human demand with the Earth’s ecological capacity to regenerate. It represents the amount of biologically productive land and sea area needed to regenerate the resources a human population consumes and to absorb and render harmless the corresponding waste.

CARBON FOOTPRINTS For an entrepreneur wanting to do the right thing by the environment, it’s useful to calculate the company’s carbon footprint. That means expressing all business activities in their carbon dioxide (CO2) equivalent emissions, which gives the firm a way to measure its environmental impact and track progress in adopting sustainable business practices. The Greenhouse Gas Protocol (GHG Protocol) sets the global standard for how to measure, manage and report greenhouse gas emissions. Several methodologies are being used and while they all talk about the same set of emissions, they differ in their boundary definitions. Different business sectors are dominated by different types of emissions. Those in office-based and service-sector industries, such as accounting firms and other consultancies, will find most of their greenhouse gas emissions come from taxis, transport, flights and outsourcing. On the other hand, manufacturing businesses (for example, aluminium, cement, iron and steel, pulp and paper, refrigeration, semiconductors, wood products) differ greatly in their energy emissions.

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On the surface, the task of calculating a carbon footprint looks easy enough. However, there are some complexities. A straightforward way of getting started is to use one of the carbon calculators applicable for smaller businesses. The standard emissions categories are energy, fuel, business travel (by vehicle, public transport and air), office space and contents, waste, water and sewerage and food. The calculators work on the dollar spent or quantity purchased in a particular timeframe.

Carbon footprint calculators The following organisations provide useful carbon footprint calculators: • Greenhouse Gas Protocol, http://www.ghgprotocol.org > calculation tools • Australia: Sydney University Centre for Integrated Sustainability Analysis, http:// www.isa.org.usyd.edu.au • Australia including Papua New Guinea and Fiji: One Degree (News Limited), http:// 1degree.com.au > resources > measure your footprint • Australia: Carbon Reduction Institute, http://noco2.com.au • Australia: Department of the Environment, http://www.environment.gov.au/climate-change/ publications/carbon-neutral-program-guidelines • New Zealand: Sustainable Business Council, http://www.nzbcsd.org.nz > resources & tools > emissions guide • New Zealand: http://catalystnz.co.nz > sustainability > carbon calculators • UK: The Clean Planet Trust, http://www.puretrust.org.uk/Home/Business/Calculator.aspx

Food or product miles The food in an Australian’s shopping basket in a city like Melbourne may have travelled a staggering 70 803 kilometres – equivalent to almost two trips around the world.27 Those food miles take a toll on the environment, through greenhouse gas emissions from road, air and sea freight. Food miles is a term which refers to the distance food is transported from the time of its production until it reaches the consumer. But the concept has also been translated into other types of products such as timber miles (for example, Brazilian hardwoods), steel miles (for example, iron ore from Australia through China to the end user) and chocolate miles (for example, cocoa beans from West Africa through Belgium to the rest of the world). However, claims of ‘food miles’ can be deceptive. For instance, according to one study, New Zealand claims it has greater production efficiency in many food commodities compared with the UK (fewer fertilisers and animals able to graze year-round outside). In the case of the dairy industry, New Zealand is twice as energy efficient, even including transport cost, as the UK.28 For an example of food miles calculation see the Experiencing Entrepreneurship exercise ‘How to calculate food miles’ at the end of this chapter.

SOCIAL IMPACT ANALYSIS As part of their reporting, companies can quantify and monetise the social impact of a product or service. The methodology for measuring, managing and communicating social and environmental impact is the social impact assessment (SIA). The output measure of the SIA process, the social return on investment (SROI), should be viewed not as a discrete metric, but as part of a larger picture on how to report and improve social value creation. Social impact is any non-financial benefits that a venture will create for society that would otherwise not be created. According to the World Bank, SIA is based on stakeholder analysis and is particularly useful for disaggregating data on assets (physical, financial) and capabilities (human, organisational) into

578 Part 4: Growth strategies for entrepreneurial ventures

meaningful social categories. When reasonable national survey data exists, SIA uses a range of qualitative data collection tools (for example, focus groups, semi-structured key informant interviews, ethnographic field research, stakeholder workshops) to determine impacts, stakeholder preferences and priorities and constraints on implementation. In the absence of adequate quantitative data, SIA supplements qualitative, sociological impact analysis with purposive surveys that capture direct impacts and behavioural responses to reform, or specific dimensions (for example, time-use patterns) that affect reform outcomes. The New Economic Foundation has pioneered the use of SROI as a method of proving the wider social value created by companies and organisations with a social purpose.29 SROI measures the value of the benefits relative to the costs of achieving those benefits. It is a ratio of the net present value of benefits to the net present value of the investment. For example, a ratio of 3:1 indicates that an investment of $1 delivers $3 in social value, shown by the equation: [SROI] ¼ [Net present value of benefits] / [Net present value of investment]

Chapter 15: Measuring performance for entrepreneurial ventures 579

SUMMARY We began by emphasising the need for performance measures in an entrepreneurial company. These traditionally have been limited only to bottom-line indicators that tell the shareholder how well the company is doing financially without regard to other factors such as society or the environment. We then described the principles of traditional financial accounting to entrepreneurs. In the first instance, three principal financial statements are important to entrepreneurs: the balance sheet, the income statement and the cash-flow statement. The budgeting process facilitates financial statement preparation. Some key budget forecasts that entrepreneurs should prepare are the operating budget, the cash-flow budget and the capital budget. The operating budget typically has various kinds of forecasts, such as sales expense, production and operating forecasts. A cash-flow budget provides an overview of the inflows and outflows of cash during a specific period. Pro forma financial statements then are prepared as projections of the firm’s financial position over a future period (pro forma income statement) or on a future date (pro forma balance sheet). The operating and cash-flow budgets often are used to prepare these pro forma statements and a sensitivity or ‘what if’ analysis assists to test key assumptions embedded in the forecasting models. The capital budget is used to help entrepreneurs make investment decisions. The three most common methods of capital budgeting are the payback method, the net present value method and the internal rate of return method. Another commonly used decision-making tool is break-even analysis, which tells how many units must be sold in order to break even at a particular selling price. It is possible to use this analysis even when fixed or variable costs can only be estimated. Ratio analysis can be a helpful analytical tool for entrepreneurs. Ratios are designed to show relationships between financial statement accounts. Finally, we focused on the new form of performance measurement called ‘triple bottom line’ accounting that goes beyond financial accounting and has three areas of impact: planet, people and profit. We examined some of the new forms of concrete performance measures that have been developed. These included carbon footprints and food miles.

KEY TERMS AND CONCEPTS accounts payable accounts receivable accrual system of accounting administrative expenses allowance for uncollectable accounts assets balance sheet bank loan break-even analysis budget capex capital budget capital budgeting cash cash-flow budget cash-flow statement contribution margin approach cost of goods sold (cogs) current assets current liabilities

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debt servicing depreciation expenses financial ratio analysis financial statement fixed assets fixed cost food miles gross profit horizontal analysis income income statement interest interest expense internal rate of return (IRR) method inventory investing activities investment liabilities linear regression

Review key terms with interactive flashcards

loan payable long-term liabilities mixed costs net income net present value (NPV) method net profit net worth note payable operating budget operating cash flows operating expenses owners’ equity

580 Part 4: Growth strategies for entrepreneurial ventures

payback method prepaid expenses pro forma statement profit and loss statement retained earnings revenues sales forecast selling expenses sensitivity analysis

short-term liabilities social impact assessment (SIA) social return on investment (SROI) stakeholder sustainability performance measures sustainable development taxes payable

time value of money triple bottom line triple bottom line (TBL) indicators variable cost vertical analysis working capital

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

What do we mean by performance measures? What are the traditional ones? Why do we need to look beyond these now? Describe the purpose of each of the balance sheet, income statement and cash flow statement. Why are these three statements of accounts important for an entrepreneur to understand? Explain in detail. What are the benefits of the budgeting process? Describe two sales forecasting methods and explain how they are used. Describe how an operating budget is constructed. Describe how a cash-flow budget is constructed. What are pro forma statements? How are they constructed? Be complete in your answer. Describe how a capital budget is constructed. One of the most popular capital-budgeting techniques is the payback method. How does this method work? Give an example. Describe the net present value method. When would an entrepreneur use this method? Why? Make up an example similar to the entrepreneur featured in the Entrepreneurship in Practice box entitled, ‘The Indian entrepreneur and the cunning NPV’. Describe the internal rate of return method. When would an entrepreneur use this method? Why? When would an entrepreneur be interested in break-even analysis? Explain how fixed, variable and mixed costs are used in the calculation of the break-even analysis. What is a sensitivity analysis and why should an entrepreneur seek to apply it? Explain. What is ratio analysis? How is horizontal analysis different from vertical analysis? What do we mean by triple bottom line accounting? What are its key components and how are they interlinked? Name and describe three types of sustainability performance measures.

EXPERIENCING ENTREPRENEURSHIP The project proposal Bill Sergent has just received a request for a proposal from a large computer company. The company is looking for a supplier to provide it with high-tech components for a super computer Experience this activity being built for the Department of Defence. Bill’s firm, which is only eight months old, was founded online by a group of scientists and engineers whose primary expertise is in the area of computers and high technology. Bill is thinking about making a reply to the request for a proposal, but first he wants to conduct a break-even analysis to determine how profitable the venture will be. Here is the information he will be using in his analysis: • The computer company wants 12 different components built and the purchase price will be $10 000 per component. • The total cost of building the first component will be $20 000. • The cost of building each of the 11 other components will be $8000, $6000, $5000, $4000, $5000, $6000, $8000, $10 000, $28 000, $40 000 and $40 000, respectively.

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Chapter 15: Measuring performance for entrepreneurial ventures 581

•

Bill’s company will not accept any proposal that will give it less than a 10 per cent return on sales. On the basis of this information, complete the following break-even chart and then answer the two questions. Revenues ($000) $150 140 130 120 110 100 90 80 70 60 50 40 30 20 10

1

2

3

4

5

6

7

8

9

10

11

12 Units

QUESTIONS

1 2

Should Bill bid on the contract? Why or why not? If Bill has some room for negotiation with the computer company, what would you recommend he do? Why?

EXPERIENCING ENTREPRENEURSHIP How to calculate food miles ‘Food miles’ is a term used to measure the transport distance travelled by food products between production and consumption. It can be measured in miles or kilometres. Food miles is one part of a larger complete life-cycle assessment required to compare the sustainability of individual items in food systems and must not be viewed independently of the energy used in each chain in our food system. To estimate how far food products have travelled, contact industry bodies and companies who can provide the most common points of origin, along with any processing points, specifically for your market. Road distance and port-to-port distance calculators are available online. In the table below you will see examples of how to calculate food miles to Melbourne, Australia for chocolate bars and tin cans. In the right hand column, calculate the food miles to your own locale of milk cartons and another product of your choice. CHOCOLATE BARS TO MELBOURNE

MILK CARTONS TO YOUR LOCALE

Assumptions: According to Cadbury, cocoa beans first came to Singapore from Indonesia. It was assumed that this was from South East Sulawesi, Indonesia. The milk chocolate bar is manufactured in Claremont, Tasmania, sourcing milk from Burnie, Tasmania and sugar from Mackay, Queensland.

Assumptions: Tetrapak’s long-life milk packaging is produced in Singapore and their standard milk packaging is produced in Taiwan.

Distance calculations:

Distance calculations:

Cocoa beans

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582 Part 4: Growth strategies for entrepreneurial ventures

CHOCOLATE BARS TO MELBOURNE

MILK CARTONS TO YOUR LOCALE

Kolaka, Sulawesi to Singapore ¼ 2389 km Singapore to Melbourne ¼ 7163 km Melbourne to Hobart ¼ 877 km Hobart to Claremont, Tasmania ¼ 14 km Total distance (Sulawesi to Claremont) ¼ 10 444.72 km Milk Burnie, Tasmania to Claremont, Tasmania ¼ 283 km Sugar Mackay, Qld to Hobart (assumed to be shipped from Mackay) ¼ 2844 km Hobart to Claremont ¼ 14.22 km Chocolate bars

Claremont to Hobart ¼ 14 km Hobart to Melbourne ¼ 877 km Total distance (Claremont to Melbourne) ¼ 892.12 km Total average distance for chocolate bars ¼ 14 479 km

Total average distance for milk cartons:

TIN CANS

PICK A PRODUCT TO YOUR LOCALE

Assumptions: In the production of tin cans, iron ore and coke (coal) are mined in Western Australia and then sent to Japan for the manufacture of tin plates. Sheets of tin plates are then sent back to Melbourne to be turned into cans. The cans are then sent to the various canning points for the different foods. For food tinned in other countries the food km would be higher still.

Assumptions:

Distance calculations:

Distance calculations:

Perth to Japan (Hidaki Port) ¼ 7785 km Japan (Hidaki Port) to Melbourne ¼ 9285 km Total distance ¼ 17 107 km Source: Gaballa, S. & Abraham, A. B. (2008). Food miles in Australia: A preliminary study. Melbourne: CERES. Updated March, http://www.ceres.org.au/foodmilesreport

CASE STUDIES CASE 15.1 It’s all Greek to her When Regina McDermott opened her car repair shop in Melbourne, she thought her 15 years of experience with cars was all she would need. To a degree she was right. Within six months her shop had more work than it could handle, thanks to her widening reputation. Now two years in from start-up, Regina decided she needed to invest in new diagnostic equipment to improve efficiency within the workshop.

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Her accountant came to see her to discuss finance-related matters. One of these was the need for cash budgeting. ‘I can work up a cash budget for you’, he explained. ‘However, I think you should understand what I’m doing so you will realise the importance of the cash budget and be able to visualise your cash inflows and outflows. I think you also need to make a decision regarding the new equipment you are planning to purchase. This machinery is state of the art, but, as we discussed last week, you can buy a number of different types of machinery. You are going to have to decide which is the best choice.’ Regina explained to her accountant that she was indifferent about which equipment to buy. The choices came down to three. There was the Hobmax ProSys Diagnostic for $5935, the AutoRep AS 555003 for $4995 or the Druthers Redline X30 for $3800. ‘All of this machinery is good. Perhaps I should purchase the cheapest’ she reasoned. Another factor to consider was the benefit she could leverage from each machine. The Hobmax was the most expensive but offered more utility that would likely improve her throughput in the shop by 20 per cent in routine maintenance and 15 and 10 per cent respectively for small repairs and large repairs. The Autorep was an easy to use machine but without some of the bells and whistles of the Hobmax and therefore she could increase her business by as much as 25 per cent for routine repairs but maybe only 5 per cent for the small repair work and next to nothing for large repairs. The cheapest machine, the Druthers, was a specialised machine for routine maintenance only and she could see up to a 40 per cent improvement in her monthly throughput in that side of her business if she purchased this option. At this point the accountant explained to her that she could use a number of ways to evaluate this type of decision. ‘You can base your choice on the payback method – how long it takes to recover your investment in each of these pieces of equipment. You can base it on net present value by discounting future cash flows to the present. Or you can base it on internal rate of return, under which the cash flows are discounted at a rate that makes the net present value of the project equal to zero.’ Regina listened quietly and when the accountant was finished, she told him, ‘Let me think about the various ways of evaluating my capital investment and I’ll get back to you. Then, perhaps, you and I can work out the numbers together’. Her accountant said this sounded fine to him and he left. Regina began to wish she had taken more accounting courses while at university. As she explained to her husband, ‘When the accountant begins to talk, it’s all Greek to me. But maybe I could at least forecast my revenue with the improved throughputs and calculate a payback period for each option.’ Annual

Regina’s Auto Repairs Actual Sales 2014 ($000) Routine Maintenance

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Total

Dec

4

5

6.5

5.5

6

8

7.5

6.5

6

6.5

7.5

7

76

Small Repair Work

3.25

4.5

5.5

4.5

5

7

6.25

6

5.7

5.6

6

6

65.3

Large Repair Work

2.5

3

4.25

3.5

4

5

4.5

4.25

4

4.2

4.5

4

47.7

9.75

12.5

16.25

13.5

15

20

18.25

16.75

15.7

16.3

18

17

189

Total per month QUESTIONS

1

Using the 2014 sales figures as a trend, with a spreadsheet, develop a sales forecast for January to December with the increase in workflow enabled by each machine purchasing option. Regina has calculated that she obtains a net margin of 5, 9.5 and 15 per cent respectively for the routine maintenance work, small and large repair work. Using these assumptions and assuming she buys the machine in December 2014 ready for January 2015, determine: a Which machine purchase offers the best (shortest) payback in 2015 and how many months will it take for each option?

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2 3

b Which option will generate the greatest revenue increase in terms of dollars under the assumptions Regina has applied? c Which option provides the best forecast net percentage margin return on total revenue (net margin in dollars/total sales in dollars)? How does the net present value method work? How would you explain this method to Regina? How does the internal rate of return method work? How would you explain it to Regina?

CASE 15.2 The contract proposal Dennis Darby owns a small manufacturing firm that produces electronic components for use in helicopters. Most of his business is a result of military and aircraft manufacturer contracts, although 10 per cent of revenues come from firms that own or rent helicopters. The latter are typically large companies or leasing/rental firms that work on a contractual basis for clients. Dennis would like to increase his revenues from sales to private companies that own their own helicopters. Specifically, he would like to do more business with oil companies that maintain helicopter fleets for ferrying people to and from oil rigs in the Timor Sea off Darwin and other offshore locations. Early this week, Dennis received a request from an oil company for 120 electronic components. He turned the order over to his chief estimator, who estimates that the fixed costs associated with producing these components will be $35 000, the unit variable cost will be $400 and the unit selling price will be $800. Dennis will not accept any order on which the return on sales is less than 20 per cent. Additionally, the estimator has told him that a $1000 expense can be classified as either fixed or variable. Dennis intends to take this information and make a decision whether to accept the contract from the oil company. He has to make a decision within the next three days. QUESTIONS

1 2 3

What is the break-even point for this project? Will the company make money if it manufactures the components? Show your calculations. If the project will be profitable, will it provide Dennis with the desired 20 per cent return? Explain. Of what value is break-even analysis to Dennis? Be complete in your answer.

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below.

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accounts payable accounts receivable accrual system break-even analysis cash flow common shares debt servicing depreciation dividends 1

2

3

equity financial ratio food miles gross profit investment liabilities net present value net worth operating budget

preferred shares revenues sales forecast sustainable development time value of money triple bottom line working capital

This text purposely emphasises the social and environmental responsibility of entrepreneurial firms. However there is a key issue that is difficult to resolve in that the measurement of social value added is far less tangible to measure than financial value added. In the article by Knife, Haughton and Dixon (2014), ‘Measuring sustainability and effectiveness of social value creation by social sector actors/social enterprises, within developing countries’, in the Academy of Entrepreneurship Journal, 20(1), pp. 1–22, they discuss the issues of transparency and the indicators of social value added. Review the article and determine the factors that are important for a social enterprise to track and openly communicate with respect to demonstrating social value added. Any entrepreneurial venture is at risk of ‘throwing good money after bad’. That is to say that it is difficult to make the decision to quit the pursuit of an opportunity, and therefore people will continue to invest their time and money into a venture with the hope that at some point it will succeed. This decision to continue, which may be better stated as the lack of a decision to quit, reflects a decision made based upon ‘sunk cost’ or those costs associated with trying that have not yielded a positive return. R. Preston McAfee, Hugo M. Mialon and Sue H. Mialon (April 2010) in their article ‘Do sunk costs matter?’ in Economic Inquiry, 48(2), 323–6 have explored the rationality of such decisions. Locate and review the arguments presented in the article and set up a debate within the class with each team debating either the affirmative or negative case of the claim that ‘Sunk costs drive entrepreneurs to even greater outcomes’. Locate the article by Bob O’Hara on ‘Exit planning: Preparing today with tomorrow in mind’, published in Financial Executive (May 2011, p. 65) and discuss why measuring firm performance is important for preparing for an exit strategy.

ENDNOTES 1 Stancill, J. M. (1981). Managing financial statements: Image and effect. Harvard Business Review, March/April, 180. 2 Bisoux, B. (2008). Uniting business, uniting nations. BizEd, July/August, 16–21. 3 See McMahon, R. G. P. & Davies, L. G. (1994). Financial reporting and analysis practices in small enterprises: The IR association with growth rate and financial performance. Journal of Small Business Management, January, 9–17; and Brinckmann, J., Salomo, S. & Gemuenden, H. G. (2011). Financial management competence of founding teams and growth of new technologybased firms. Entrepreneurship Theory and Practice 35(2), 217–43. 4 Macur, K. M. & Gustafson, L. (1992). Financial statements as a management tool. Small Business Forum, Fall, 23–34; see also Dove, R. (2000). Financial

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statements. Accountancy, January, 7; Clarke, E. A. (2012). Accounting: An introduction to principles and practice (7th edn). Melbourne: Cengage Learning. 5 See Warren, C. S., Reeve, J. M. & Duchac, J. (2013). Accounting (24th edn). Mason, OH: South-Western/Cengage. 6 This example is based on Professor Frederick’s own business. The figures used do not represent actual figures but are used to illustrate accounting practice. 7 See Emigh, J. (1999). Balance sheet. ComputerWorld, 15 November, 86. 8 See Capel, J. (1999). Balancing the books. Supply Management, November, 94; and Warren, C. S., Reeve, J. M. & Duchac, J. (2016). Financial & managerial accounting (13th edn). Melbourne: Cengage Learning. 9 Churchill, N. C. (1984). Budget choice: Planning vs. control. Harvard Business Review, July/August, 151; and Whalen, J. M., Jones, J. P. & Pagach, D. P. (2013).

Intermediate accounting: Reporting and analysis. Mason, OH: South-Western/ Cengage. 10 Stickney, C., Brown, P. & Whalen, J. M. (2007). Financial reporting, financial statement analysis, and valuation: A strategic perspective (6th edn). Mason, OH: South-Western/Cengage Learning. 11 Waedt, F. (1995). Understanding cash flow statements, or what you need to know before you ask for a loan. Small Business Forum, Spring, 42–51; see also Mudambi, R. & Zimmerman Treichel, M. (2005). Cash crisis in newly public internet-based firms: An empirical analysis. Journal of Business Venturing, 20(4), July, 543–71. 12 See Warren, Reeve & Duchac, Financial & managerial accounting, 13th edn. 13 See Warren, Reeve & Duchac, Financial & managerial accounting, 13th edn.

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14 See Warren, Reeve & Duchac, Financial & managerial accounting, 13th edn. 15 Sinclair, K. P. & Talbott, J. A. Jr. (1986). Using break-even analysis when cost behavior is unknown. Management Accounting, July, 53. See also Cunningham, B. M., Nikolai, L. A. & Bazley, R. D. (2000). Accounting: Information for business decisions. Fort Worth, TX: The Dryden Press, 70–4. 16 See Brigham, E. F. & Houston, J. F. (2013). Fundamentals of financial management (13th edn). Mason, OH: South-Western/Cengage. 17 Macur, K. M. & Gustafson, L. (1992). Financial statements as a management tool. Small Business Forum, Fall, 23–34; see also Hitchings, R. (1999). Ratio analysis as a tool in credit assessment. Commercial Lending Review, Summer, 45–9; and Andrea Biancalani Online, Financial ratio analysis, http:// www.andreabiancalani.it/fin1.htm. For an interesting discussion, see Huff, P. L. (2000). Should you consider company size when making ratio comparisons? National Public Accountant, February/ March, 8–12; see also Palepu, K. G. & Healy, P. M. (2007). Business analysis and valuation: Using financial statements, text and cases (4th edn.). Melbourne: Cengage Learning. 18 Life-cycle costing: Types of accounting costing systems, http:// accounting.suite101.com/article.cfm/ lifecycle_costing#ixzz0B0nQDral. 19 ‘Factor four – Doubling wealth, halving resource use’ was the title of the related book published by Ernst Ulrich von Weizsa¨cker and Amory and Hunter

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Lovins in 1995; Schmidt-Bleek, F. (2008). Factor 10: The future of stuff. Sustainability: Science, Practice & Policy, 4(1), 1–4, http://ejournal.nbii.org/ archives/vol4iss1/editorial.schmidtbleek.html. 20 See von Weizsa¨cker, E., Hargroves, K., Smith, M., Desha, C. & Stasinopoulos, P. (2009). Factor 5: Transforming the global economy through 80% increase in resource productivity. London: Earthscan; Germany: Droemer. 21 van Berkel, R., Willems, E. & Lafleu, M. (1997). Development of an industrial ecology toolbox for the introduction of industrial ecology in enterprises. Journal of Cleaner Production, 5(1–2), 11–25. 22 Elkington, J. (1994). Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review, 36(2), 90–100. 23 Elkington, J. (1997). Cannibals with forks: The triple bottom line of 21st century business. Oxford, UK: Capstone Publishing; see also Brown, D., Dillard, J. & Marshall, R. S., Triple bottom line: A business metaphor for a social construct, http://www.recercat.net/bitstream/2072/ 2223/1/UABDT06-2.pdf. 24 Shell by sustainability. Harvard Business Review on corporate responsibility. Harvard Business School Press; see also Chappell, T. (1993). The soul of a business: Managing for profit and the common good. New York: Bantam; Hart, S. L. (2005). Capitalism at the crossroads: The unlimited business opportunities in solving the world’s most difficult problems. Upper Saddle River, NJ: Wharton School Publishing; Savitz, A. W.

& Weber, K. (2006). The triple bottom line: How today’s best-run companies are achieving economic, social and environmental success – and how you can too. San Francisco: John Wiley & Sons; Willard, B. (2002). The sustainability advantage: Seven business case benefits of a triple bottom line (conscientious commerce). Gabriola Island, BC: New Society Publishers. 25 SustainAbility and the United Nations Environment Programme (2001). The Global Reporters: International Benchmark Survey of Corporate Sustainability Reporting, London. 26 Global Reporting Initiative, Sustainability Reporting Guidelines on Economic, Environmental, and Social Performance, June 2000. See also the Guidelines G3 released in 2006 and Guidelines G4 currently under development and available at: http:// www.globalreporting.org. 27 Gaballa, S. & Abraham, A. B. (2007). Food miles in Australia: A preliminary study. Melbourne: CERES Community Environment Park, http:// www.ceres.org.au. 28 Saunders, C., Barber, A. & Taylor, G. (2006). Food miles – Comparative energy/ emissions performance of New Zealand’s agriculture industry. Research Report No. 285, July, Canterbury: Agribusiness and Economics Research Unit, http:// www.lincoln.ac.nz/story_images/ 2328_RR285_s13389.pdf. 29 New Economics Foundation. (2008). Measuring real value: A guide to social return on investment (2nd edn.). London: New Economics Foundation.

» CHAPTER SIXTEEN DEVELOPING A SUSTAINABLE BUSINESS PLAN CHAPTER OBJECTIVES

1

To define a sustainable business plan and demonstrate its value

2 To describe the benefits of a business plan 3 To set forth the viewpoints of those who read a business plan 4 To understand the mind-set of your five-minute reader 5 To see a complete outline of an effective business plan 6 To present some helpful hints for writing an effective business plan 7 To highlight points to remember in the presentation of a business plan 8 To underline some of the contrarian viewpoints on the importance of a business plan

It is well established that you can’t raise money without a business plan. . . a business plan is a work of art in its own right. It’s the document that personifies and expresses your company. Each plan, like every snowflake, must be different. Each is a separate piece of art. Each must be reflective of the individuality of the entrepreneur. Just as you wouldn’t copy someone else’s romancing techniques, so should you seek to distinguish your plan for its differences. Joseph R. Mancuso, How to Write a Winning Business Plan1 The future belongs to those businesses who play a proactive role in devising ways in which we can meet our commercial needs and sustain the world we live in. The late Richard Pratt, CEO, Visy Industries, Melbourne, the largest private recycling company in the world2

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588 Part 4: Growth strategies for entrepreneurial ventures

THE NEED FOR A SUSTAINABLE BUSINESS PLAN When modern entrepreneurial business start-ups sit down to write a business plan, usually it’s finance, marketing and personnel that weigh on their minds. More and more investors, especially ethical venturers, are demanding that these plans focus on the three Ps: People, Profits and Planet. For it is now ‘extremely likely’ that human activity is the dominant cause of global warming.3 True, there is plenty of uncertainty in terms of the rate and geographical distribution of this change and the effects it will have. And it’s also true that most companies view climate change with a distinct lack of urgency.4 But as entrepreneurs we are collectively reaching the tipping point where we have to change our business models to respond to sustainability issues. Whether you are writing a business plan for an IT company or a food product company, you will need to integrate sustainability practices into business planning, operations and marketing. Entrepreneurs can and must advance sustainable development initiatives taking into account the importance of mitigating and adapting to climate change. Volatile weather, economic instability including stock market impacts, interruptions to transport, energy and water, price or availability changes in raw materials, demand changes for products and services, food supply glitches, and regulatory change are just a few of the likely short- and long-term business impacts of climate change. Entrepreneurs now need to plan for every final impact of their business with sections on greenhouse gases, energy use, clean power and other emissions-reducing strategies. One Harvard Business Review article commented that ‘the quest for sustainability can unearth a mother lode of organisational and technological innovations that yield both top-line and bottom-line returns’.5 And Lovins says the idea that doing business as if nature and people mattered actually creates competitive advantage.6 What do you expect people to do with your product when they have finished using it? Take electronic waste as an example – all the discarded computers, office electronic equipment, entertainment device electronics, mobile phones, television sets and refrigerators. These old devices contain contaminants such as lead, cadmium, beryllium or brominated flame retardants, and recycling involves significant risk to workers and communities. In today’s business environment, the entire life cycle of the product must be considered – this is called a cradle-to-cradle approach (see Chapter 3). The economic logic is already here. Sustainable development and competitiveness can merge if enacted wisely, so that there is not an inevitable trade-off.7 What underlies sustainable business planning is the realisation that industrial systems (for example, a business, but also an eco-region, or even the economy) are not separate from the biosphere. An entrepreneurial company is just a particular case of an ecosystem. The change in thinking today is that a business has both infrastructural capital and natural capital to spend (see Chapter 14). Ultimately natural systems have no ‘waste’, since everything is included in the framework. Business systems must model themselves after natural ones to be sustainable. This view, known as industrial ecology (see also ‘industrial metabolism’, Chapter 3, page 96), sees business as a series of interlocking ecosystems – some natural and some man-made (see Figure 16.1 and compare it to Figure 3.11 ‘Entrepreneurial ecology’, page 90). The biosphere within which the climate and other ecological systems exist surrounds the socioeconomic and regulatory systems in which the firm operates. Within this are the stakeholders, including customers. At the core is the entrepreneurial business engaged in business planning. Each of these ecosystems impinges interactively on its neighbours. Directly from the environment come the material inputs into the business process. Returning to the environment are the outputs of production or service. The goal is to pick the least burdensome environmental and social outputs when designing products and services.

Material Least

FIGURE 16.1 THE ECOLOGY OF ENTREPRENEURIAL BUSINESS PLANNING

S an take d c ho us lde tom rs ers

So reg cio-e ula co tor nom y s ic ys an tem d s

Bio s ec phe olo re, gic cli al ma sy te ste an ms d

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Entrepreneurial business planning

inputs damaging

outputs

Saatchi & Saatchi’s Adam Werbach summarises the issue as: Until now, business planning always has been about generating profits, and that cannot change. What can change in the future is how people in an organisation go about earning those profits. They have to move beyond the relentless pursuit of short-term gain toward long-term sustainability. Sustainability in a business context means long-term profitability. It is not just about being green or saving the planet: it is about enabling men and women within an organisation to create a new business strategy framework attuned to the world around them, … an organisation must be built so that it is ready for change, whatever that change may be.8

So let’s get into the nitty-gritty and see where sustainability fits in. But never forget to first locate your ‘north star goal’ – an overarching guide that is optimistic and aspirational (see the Entrepreneurship in Practice box below). This is a goal that can be achieved in a reasonable timeframe; can be acted on by your team; connects to the core of the business; drives excitement and passion; serves a higher purpose than business profitability, solves a great human challenge; and leverages your organisation’s strengths.9

RAY ANDERSON FINDS HIS NORTH STAR It all started when Ray read the story by Garret Hardin (see Tragedy of the Commons, Chapter 3, page 82) about St Matthew Island, a remote bit of land in the Bering Sea. At the end of World War II, the US Coast Guard established a long-range radio navigation system staffed by a crew of 19 men. It also imported 29 reindeer as a backup food source. The war was soon over and the men left, but over the next 13 years, the original herd feasted on lichen and expanded to 1350. With no natural predators by 1963, 6000 reindeer covered the island. Three years later, a US Fish and Wildlife biologist found only 42 reindeer alive. The explosive growth of the herd had decimated the island’s vegetation, leaving the reindeer vulnerable to starvation. When scientists visited the island in 1966 they found it littered with reindeer

ENTREPRENEURSHIP IN PRACTICE

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590 Part 4: Growth strategies for entrepreneurial ventures cont.

skeletons. All that remained were 41 females and one infertile male. By the 1980s, without a way to reproduce, no reindeer were left alive on the island. St Matthew was left a barren, windswept rock, blanketed in bones. To Ray, it was all about ‘carrying capacity’. Zero footprint became his north star goal. Ray Anderson, is founder and chairman of Interface, the commercial carpet tile company started from scratch in 1973, which by 1994 was a billion-dollar organisation and the world leader in its industry. In 1994, Anderson read about the reindeer on St Matthew Island. To his surprise, the story left him with a sense of horror, foreboding – and familiarity. Traditional carpet manufacturing is a high-input, heavy polluting industry, and Anderson began to believe that industry was doing to the planet what the reindeer had done to St Matthew Island. So, at the age of 60, Anderson decided to pivot his company away from environmental misconduct and toward sustainability – all ‘while doing well – very well – by doing good’. As he writes in his book, Confessions of a Radical Industrialist: Profits, People, Purpose – Doing Business by Respecting the Earth: ‘I wanted Interface, a company so oilintensive you could think of it as an extension of the petrochemical industry, to be the first enterprise in history to become truly sustainable – to shut down its smokestacks, close off its effluent pipes, to do no harm to the environment, and to take nothing from the earth not easily renewed by the earth.’ He didn’t waste any time. Between 1996 and 2008, Interface cut its net greenhouse gas emissions by 71 per cent in absolute tonnes. Yet over the same timeframe, Interface increased sales by 66 per cent and doubled its earnings, expanding its profit margins and propelling innovation. Interface also reduced greenhouse gas intensity (relative to sales) by 82 per cent, waste water stream by 72 per cent, landfill-bound scrap waste by 78 per cent, total energy usage by 44 per cent, smokestacks by 33 per cent and effluent pipes by 71 per cent. Interface also reached the top of GlobeScan’s Survey of Sustainability Experts – all while saving the company $405 million. And, since 2003, Interface has sold 83 million square yards of carpet with zero net global warming effect. Sources: Hawken, P. (2010), The ecology of commerce: A declaration of sustainability, Harper Business; Gallup, Inc., ‘The business of sustainability’, http://www.gallup.com/businessjournal/123464/Business-Sustainability.aspx (reprinted by permission); Klein, D. R., John Walsh & Martha Shulski, ‘What killed the reindeer of Saint Matthew Island?’, http://www.weatherwise.org/Archives/Back%20Issues/2009/ Nov-Dec%202009/full-Reindeer.html; Hardin, G., ‘An ecolate view of the human predicament’, http://www.garretthardinsociety.org/articles/ art_ecolate_view_human_predicament.html; McMillen, S. (2011). ‘‘St Matthew Island’’ (comic book), http://www.stuartmcmillen.com/ comics_en/st-matthew-island/.

CONTRARIAN VIEWS ON BUSINESS PLANNING Your book’s authors are big believers in full-form business planning. No cocktail napkin planning here. Our view is that business planning gives you an opportunity to validate your business ideas and to achieve visibility and traction from potential supporters. It is true that research evidence on the importance of business planning is mixed. Bruderl et al. show that creating a business plan had a positive influence on the chances of success.10 Delmar and Shane demonstrate that entrepreneurs who first completed business plans before talking to customers and beginning marketing or promotion had a lower termination rate.11 But Honig argued that there is little evidence that planning leads to success.12 A Spanish team found that business plan quality did not constitute a good predictor for the survival chances of new ventures.13 Sahlman says that business plans rank no higher than two on a scale from one to 10 as a predictor of a new venture’s success.14 David Gumpert’s book Burn Your Business Plan! argues that writing a business plan unnecessarily wastes time and, in fact, could be counterproductive. With the wide availability of inexpensive product development tools, entrepreneurs can go from concept to product to market without needing significant capital, or any external capital at all. Reaching customers and large markets can be as simple as creating a website and using online social networking tools. Gumpert urges entrepreneurs instead to focus on key hands-on tasks that are more likely to impress professional investors – tasks such as preparing an effective oral presentation, writing a clear and compelling synopsis, developing a website that captures a business model and assembling

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hard-hitting financial projections. ‘Business plans are the equivalent of ‘‘intellectual push-ups’’. Nice exercise, but not necessarily relevant to anything in the real world’.15 One excellent alternative business planning tool is known as the Lean Canvas method. In 2010, Alex Osterwalder published his book, Business Model Generation, where he defined a template called a Business Model Canvas, for documenting business models.16 Instead of writing a long and in-depth business plan, Lean Canvas Planners advocate a simpler approach, essentially on a single sheet of paper. Osterwalder’s Business Model Canvas puts all the complicated strategies of your business in one simple diagram. Each of the nine boxes in the canvas specifies details of your company’s strategy. (The Business Model Canvas is one of the three components of the Lean Startup – see Figure 16.2.) You start simply by defining your business identity: what’s your value

Key partners

Key activities

Value propositions

Customer relationships

Customer segments

Who are our key partners? Who are our key suppliers? Which key resources are we acquiring from our partners? Which key activities do partners perform?

What key activities do our value propositions require? Our distribution channels? Customer relationships? Revenue streams?

What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each segment? Which customer needs are we satisfying? What is the minimum viable product?

How do we get, keep and grow customers? Which customer relationships have we established? How are they integrated with the rest of our business model? How costly are they?

For whom are we creating value? Who are our most important customers? What are the customer archetypes?

Key resources

Channels

What key resources do our value propositions require? Our distribution channels? Customer relationships? Revenue streams?

Through which channels do our customer segments want to be reached? How do other companies reach them? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines?

Cost structure What are the most important costs inherent to our business model? Which key resources are most expensive? Which key activities are most expensive?

Revenue streams For what value are our customers really willing to pay? For what do they currently pay? What is the revenue model? What are the pricing tactics?

Source: Steve Blank, ‘Why the lean start-up changes everything’, Harvard Business Review, May 2013, Copyright ª 2013 by Harvard Business Publishing. Used by permission. https://hbr.org/2013/05/why-the-lean-start-up-changes-everything

FIGURE 16.2 OSTERWALDER’S LEAN CANVAS PLANNING METHOD

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proposition to your customers? Then you describe your target market. You build a plan of action and put in measures to validate your assumptions. Finally you develop basic forecasts and budgets to track your progress. This condensed planning model may be useful for high-growth, technology gazelles (think Silicon Valley), but one size doesn’t fit all. Some entrepreneurs can’t figure out their key value proposition without first thoroughly researching the customer. Traditional businesses may have trouble with the ‘customer relationships’ section. Finally, Lean Canvas doesn’t help entrepreneurs determine if their company is truly financially viable without rigorous financial planning. In reality the whole scene has changed. These days, a business plan can be as long as a short novel or as short as a Venn diagram showing where markets overlap. Sometimes the market is so hot that writing the plan just takes too much time or the idea will become quickly outdated. Tech companies in particular just skip the plan and go straight to market. Still, you are going to get nowhere with banks and private investors without a plan. But views are changing; former Apple executive and now private investor, John Sculley, is more interested in a customer plan – hearing from the start-up’s founders why a customer will want their particular product or service.17 Gumpert suggests that rather than writing a 50-page business plan for the investor, a 12-slide deck may be enough: • What is the opportunity? • What gives you special advantages in solving the problem? • What makes you think that the people involved in your company are especially qualified to grow this business? • What is the business model? • What makes it scalable? • How do you know you’ll have customers? • How do you connect to customers? • What is the secret of your expected sales success? • What have you learned from the competition? • What are the risk factors? • How will you make money? • How will you use the funds you raise?18 Maybe even the back of a napkin would suffice. Yes, there’s a planning method for that too!19 Whatever you decide to do, there’s no substitute for planning. How and where you present your idea is changing with the times. There has been a huge growth in new style competitions. Cornell says these new kinds of competitions do less to celebrate the quality of the idea or of the plan while doing more to enable the entrepreneur to develop and execute the idea.20 His list of them is shown in Table 16.1.

BENEFITS OF THE FULL-FORM BUSINESS PLAN Enough said about contrarian views. Your authors are fans of the full monty business planning approach and believe that napkins and whiteboards should probably only be used as part of the initial stages of planning. The time and effort involved in writing a proper full business plan forces you to view the venture critically and objectively. It helps you to quantify objectives and measurable benchmarks. It is also a communication tool to proselytise to your markets and to potential sources

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TABLE 16.1

THE MODERN LANDSCAPE OF ENTREPRENEURSHIP COMPETITIONS BUSINESS MODEL COMPETITIONS

ACCELERATOR COMPETITIONS

START-UP WEEKENDS AND HACKATHONS

DEMO DAYS AND PITCH EVENTS

Reasons for conducting the competition

Universities: to foster student success and ultimately to demonstrate credibility. Government: economic growth.

Evaluating the best ideas and entrepreneurs to enter ‘acceleration’ for eventual investment.

Entrepreneurs encouraging collaboration among themselves.

Showcasing entrepreneurs and viable ventures to VCs and angel investors.

Solving big problems or addressing specific markets.

Judging

Faculty, local mentors, entrepreneurs, some investors.

Seed-stage angel investors, successful entrepreneurs.

Local entrepreneurs, local business leaders.

Seed angel investors, VCs, successful entrepreneurs.

Professional full time or volunteer committee. Sometimes judged by ‘the crowd’.

Structure

Business plans submitted and reviewed. Live evaluation of finalists.

Submit basic application. Live pitch/ demo at an event.

Collaborate with peers over a long weekend on a technical prototype. Demo and pitch in front of judges.

Successive rapid pitches in front of judges and audience.

Varies. Often successive judging/ pitch competitions.

Entrance requirements / criteria

Business plan.

Application, team, pitch/demo.

Hands-on development skills.

Pitch, basic product demo.

Innovative prototype/ product.

Ideal outcomes (for the entrepreneur)

Cash prize, recognition.

Seed-capital, participation in a program. Startup development.

Team formation. Prototype development. Idea validation. Cash prize/ services.

VC/angel investment. Visibility and traction.

Cash prize. Customer validation/adoption. Visibility.

PRIZE CHALLENGES

Source: Cornell, C-J., The metamorphosis of business plan competitions, NCIIA 2014, Venture Well (formerly National Collegiate Inventors and Innovators Alliance). Copyright ª 2014 by C.J. Cornell. Used by permission.

of funds. Your stakeholders get a lot out of a business plan. The business plan provides the financial details and plans for securing a share of the market. It gives potential investors the opportunity to consider if your company can service a debt. It helps identify critical risks and crucial events with a discussion of contingency plans. For people with no prior knowledge of the entrepreneur or the venture, the business plan provides a useful guide for assessing the individual entrepreneur’s planning and managerial ability. In end effect, the business plan may help you avoid a project doomed to failure. As one researcher states, ‘If your proposed venture is marginal at best, the business plan will show you why and may help you avoid paying the high tuition of business failure. It is far cheaper not to begin an ill-fated business than to learn by experience what our business plan could have taught you at a cost of several hours of concentrated work.21 It is important that you prepare your own business plan. If an entrepreneurial team is involved, then all of the key members should be part of writing the plan; in this case, it is important that the lead entrepreneur understand the contribution of each team member. Seeking the advice and assistance of outside professionals is always wise, but you personally need to understand every aspect of the business plan, because you are the one who will come under the scrutiny of financial sources. Thus, the business plan stands as your prediction for your venture – simply put, it is your responsibility.22

594 Part 4: Growth strategies for entrepreneurial ventures

There was a huge flaw in the design. Did Billie do proper business planning? Read about it on CourseMate Express.

For the entrepreneur, the following benefits are gained: • The time, effort, research and discipline needed to put together a formal business plan force the entrepreneur to view the venture critically and objectively. • The competitive, economic and financial analyses included in the business plan subject the entrepreneur to close scrutiny of his or her assumptions about the venture’s success. • Because all aspects of the business venture must be addressed in the plan, the entrepreneur develops and examines operating strategies and expected results for outside evaluators. • The business plan quantifies objectives, providing measurable benchmarks for comparing forecasts with actual results. • The completed business plan provides the entrepreneur with a communication tool for outside financial sources as well as an operational tool for guiding the venture towards success.23 The potential sponsors and funders who read the plan derive the following benefits from the business plan: • The business plan provides the details of the market potential and plans for securing a share of that market. • Through prospective financial statements, the business plan illustrates the venture’s ability to service debt or provide an adequate return on equity. • The plan identifies critical risks and crucial events with a discussion of contingency plans that provide opportunity for the venture’s success. • By providing a comprehensive overview of the entire operation, the business plan gives financial sources a clear, concise document that contains the necessary information for a thorough business and financial evaluation. • For a financial source with no prior knowledge of the entrepreneur or the venture, the business plan provides a useful guide for assessing the individual entrepreneur’s planning and managerial ability.24

WRITING A WELL-CONCEIVED BUSINESS PLAN Most investors agree that only a well-conceived and well-developed business plan can gather the necessary support that will eventually lead to financing. The business plan must describe the new venture with excitement and yet with complete accuracy.

WHO READS THE PLAN? Although numerous professionals may be involved with reading the business plan – such as venture capitalists, bankers, angel investors, potential large customers, lawyers, consultants and suppliers – entrepreneurs need to clearly understand three main viewpoints when preparing the plan.25 The first viewpoint is, of course, the entrepreneur’s, because he or she is the one developing the venture and clearly has the most in-depth knowledge of the technology or creativity involved. This is the most common viewpoint in business plans, and it is essential. However, too many plans emphasise this viewpoint and neglect the viewpoints of the potential market and customers as well as the investors. The second viewpoint is the customers. You must have a ‘market-driven’ company that convincingly demonstrates the benefits to users (the particular group of customers it is aiming for) and the existence of a substantial market. Too many entrepreneurs tend to de-emphasise in-depth marketing information in their business plans.26 Establishing an actual market (determining who will

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buy the product or use the service) and documenting that the anticipated percentage of this market is appropriate for the venture’s success are valuable criteria for the business plan. The third viewpoint is the ‘other’ market, namely the investor’s point of view, which is focused on the financials. Sound financial projections are necessary if investors are to evaluate the worth of their investment. This is not to say that an entrepreneur should fill the business plan with spreadsheets of figures. In fact, many venture capital firms employ a ‘projection discount factor’, which merely represents the belief of venture capitalists that successful new ventures usually reach approximately 50 per cent of their projected financial goals.27 However, a three-to-five-year financial projection is essential for investors to use in making their judgement of a venture’s future success. Most potential sponsors or funders give your business plan a five-minute reading. The following six steps represent the typical business plan reading process that many venture capitalists use (less than one minute is devoted to each step): Step 1: Determine the characteristics of the venture and its industry. Step 2: Determine the financial structure of the plan (amount of debt or equity investment required). Step 3: Read the latest balance sheet (to determine liquidity, net worth and debt/equity). Step 4: Determine the quality of entrepreneurs in the venture (sometimes the most important step). Step 5: Establish the unique feature in this venture (find out what is different). Step 6: Read over the entire plan lightly (this is when the entire package is paged through for a casual look at graphs, charts, exhibits and other plan components).28 Is it unjust to expect just a five-minute reading? Well, that’s the nature of the process for many funders. To be fair, other sources may devote more time to analysing the plan. But keep in mind that these people read through numerous business plans in a sitting, so knowing their reading process is valuable for developing any plan.

PUTTING THE PACKAGE TOGETHER A business plan gives sponsors and funder their first impressions of a company and its principals. The following points are a collection of recommendations by experts in venture capital and new-venture development. Form as well as content is important; experts know that good form reflects good content, and vice versa. •

•

• •

•

•

ENTREPRENEURSHIP IN PRACTICE

Orient the plan towards the future. Entrepreneurs should attempt to create an air of excitement in the plan by developing trends and forecasts that describe what the venture intends to do and what the opportunities are for the use of the product or service. Avoid exaggeration. Sales potentials, revenue estimates and the venture’s potential growth should not be inflated. Many times, a best-case, worst-case, and probable-case scenario should be developed for the plan. Documentation and research are vital to the plan’s credibility. (See Table 16.2 for business plan phrases.) Highlight critical risks. The critical-risks segment of the business plan is important in that it demonstrates the entrepreneur’s ability to analyse potential problems and develop alternative courses of action. Give evidence of an effective entrepreneurial team. The management segment of the business plan should clearly identify the skills of each key person as well as demonstrate how all such people can effectively work together as a team to manage the venture. Do not over-diversify. Focus the attention of the plan on one main opportunity for the venture. A new business should not attempt to create multiple markets or pursue multiple ventures until it has successfully developed one main strength. Identify the target market. Substantiate the marketability of the venture’s product or service by identifying the particular customer niche being sought. This segment of the business plan is pivotal to the success of the other parts. Market research must be included to demonstrate how this market segment has been identified. cont.

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596 Part 4: Growth strategies for entrepreneurial ventures cont.

TABLE 16.2

COMMON BUSINESS PLAN PHRASES – STATEMENT VERSUS REALITY

STATEMENT

REALITY

We conservatively project . . .

We read a book that said we had to be a $50 million company in five years and we reverse-engineered the numbers.

We took our best guess and divided by 2.

We accidentally divided by 0.5.

We project a 10 per cent margin.

We did not modify any of the assumptions in the business plan template that we downloaded from the Internet.

The project is 98 per cent complete.

To complete the remaining 2 per cent will take as long as it took to create the initial 98 per cent, but will cost twice as much.

Our business model is proven . . .

. . . if you take the evidence from the past week for the best of our 50 locations and extrapolate it for all the others.

We have a six-month lead.

We tried not to find out how many other people have a six-month lead.

We need only a 10 per cent market share.

So do the other 50 entrants getting funded.

Customers are clamouring for our product.

We have not yet asked them to pay for it. Also, all of our current customers are relatives.

We are the low-cost producer.

We have not produced anything yet, but we are confident that we will be able to.

We have no competition.

Only IBM, Microsoft, Netscape and Sun have announced plans to enter the business.

Our management team has a great deal of experience . . .

. . . consuming the product or service.

A select group of investors is considering the plan.

We mailed a copy of the plan to everyone in Pratt’s Guide.

We seek a value-added investor.

We are looking for a passive, dumb-as-rocks investor.

If you invest on our terms, you will earn a 68 per cent internal rate of return.

If everything that could ever conceivably go right does go right, you might get your money back.

Source: Reprinted by permission of Harvard Business Review. Adapted from Sahlman, W. A. (1997). How to write a great business plan. July/August, 106. Copyright ª 1997 by the Harvard Business Publishing. Used by permission.

•

•

•

• •

Keep the plan written in the third person. Rather than continually stating ‘I’, ‘we’ or ‘us’, the entrepreneur should phrase everything as ‘he’, ‘she’, ‘they’ or ‘them’. In other words, avoid personalising the plan, and keep the writing objective. Capture the reader’s interest. Because of the numerous business plans submitted to investors and the small percentage of business plans funded, entrepreneurs need to capture the reader’s interest right away by highlighting the uniqueness of the venture. Use the title page and executive summary as key tools to capture the reader’s attention and create a desire to read more. Appearance. Not sloppy or lavish. A plastic spiral binding, holding together a pair of cover sheets of a single colour, provides both a neat appearance and sufficient strength to withstand handling by a number of people without damage. Length. A business plan should be no more than 20–25 pages long. Sharpen your ideas to hold funders’ attention. Background details can be included in an appendix. Cover and title page. The cover should bear the name of the company, its address and phone number, and the month and year in which the plan is issued. Inside the front cover should be a well-designed title page on which the cover information is repeated and, in an upper or a lower corner, the ‘copy number’ provided. cont.

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cont.

•

•

Executive Summary. The two to three pages immediately following the title page should concisely explain the company’s current status, its products or services, the benefits to customers, the financial forecasts, the venture’s objectives in three to seven years, the amount of financing needed, and how investors will benefit. This is a tall order for a two-page summary, but it will either sell investors on reading the rest of the plan or convince them to forget the whole thing. Table of Contents. After the executive summary, include a well-designed table of contents. List each of the business plan’s sections and mark the pages for each section. Sources: These guidelines are adapted from Jeffrey A. Timmons, ‘A business plan is more than a financing device’, Harvard Business Review (March/April 1980), 25–35; W. Keith Schilit, ‘How to write a winning business plan’, Business Horizons (September/October 1987), 13–22; William A. Sahlman, ‘How to write a great business plan’, Harvard Business Review (July/August 1997), 98–108; and Donald F. Kuratko, The complete entrepreneurial planning guide (Bloomington: Kelley School of Business, Indiana University, 2013).

HOW TO STRUCTURE A BUSINESS PLAN A detailed business plan usually includes anywhere from eight to 12 sections (depending on the idea, the industry and the technical details). The ideal length of a plan is 25 pages, although – depending on the need for detail – the overall plan can range from 20 to more than 30 pages if an appendix is included.29 Obviously, there will be occasions when you will need to deviate from the typical structure which is outlined in Table 16.3. TABLE 16.3

COMPLETE BUSINESS PLAN OUTLINE (CBPO)

Section I: Executive summary A Objectives B Values, vision and mission C How we measure our success D Start-up summary E Investment offering Section II: Business description A General description and business rationale B Industry background C Goals and potential D Uniqueness of product or service Section III: Statement on sustainability A Performance measures Section IV: Marketing A Marketing vision B Market Research and analysis 1 Target market (customers) identified 2 Market size and trends 3 Competitor analysis 4 Remarkable difference C Marketing plan 1 Market strategy 2 Branding elements 3 Price rationale 4 Marketing materials 5 Advertising and promotions 6 Web plan 7 Sales strategy and forecast Section V: Research, design and development

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TABLE 16.3

COMPLETE BUSINESS PLAN OUTLINE (CBPO) (Continued )

Section VI: Operations A Identify location 1 Advantages 2 Zoning 3 Taxes B Proximity to supplies C Access to transportation Section VII: Management A Management team – key personnel B Legal structure – stock agreements, employment agreements, ownership C Board of directors, advisers, consultants Section VIII: Financial Plan A Start-up funding B Important assumptions C Break-even analysis 1 Profit and loss 2 Cash flow D Balance sheet E Business ratios Section IX: Critical risks A Potential problems B Obstacles and risks C Environmental risks D Alternative courses of action Section X: Harvest strategy A Transfer of asset B Continuity of business strategy C Identify successor Section XI: Milestone schedule A Timing and objectives B Deadlines and milestones C Relationship of events Section XII: Investment information Section XIII: Appendix or bibliography Source: Adapted from Kuratko, D. F. & McDonald, R. C. (2013), The entrepreneurial planning guide, Bloomington: Copyright ª 2013 by Kelley School of Business, Indiana University.

EXECUTIVE SUMMARY Many people who read business plans (bankers, venture capitalists, investors) like to see a summary of the plan that features its most important parts. Write the summary only after the entire business plan has been completed. Since the summary is the first and sometimes the only part of a plan read, it must present the quality of the entire report. And this should be done in such a way that the evaluator or investor will choose to read on. This is where you briefly also list the values, vision and mission of the company. What are the core values that guide your company? What is your guiding vision? Since this may be the only thing a potential funder reads, you also need to include two more very important items: • First-time readers will want to read your start-up summary that explains the expenses you make before you start the business; the assets you want to have in the company as it starts; and how you intend to finance these, which means borrowing money and bringing in new investments. • Also very critical if you are seeking outside investment is to explain the key elements in the Investment Offering (Section XII).

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BUSINESS DESCRIPTION Think of this as ‘introducing’ your company to someone. Identify the venture’s name, with any special significance related (for example, family name, technical name). Quickly present your industry’s background in terms of current status and future trends. Now describe the new venture thoroughly along with its proposed potential. Drawings and photographs also may be included. Don’t fail to mention the potential advantages the new venture possesses over the competition. This discussion may include patents, copyrights and trademarks, as well as special technological or market advantages. How long have you been in business? Who owns the company? Is that ownership shared? Describe your industry. What common traits best describe the industry? How do businesses in this industry make, buy, sell and deliver their products or services? How do customers for this industry make their buying decisions? Finally, you need to explain what you actually sell. Describe the main features of each product or service. What does the product do to fulfil the concrete needs of your customers?

SUSTAINABILITY Describe here how you define sustainability, and what you think it means to your business. Combine the definition with principles that make up your strategy or policy. This definition depends on what type of business you are, what green resources are available to you, your market and industry and your level of commitment to sustainability. If you plan to be certified green in some way, your definition of sustainability may be based on information provided by the certifying agency. Give concrete measures of sustainability.

Sustainability performance measures This segment should describe your firm’s economic contributions to sustainability, its impacts on the economic circumstances of its stakeholders, and its influence on economic systems at the local, national and global levels (see Chapter 15 on how to measure your performance). Describe the impact the venture has on major stakeholder groups, like customers, suppliers, employees, providers of capital and the public sector. Include some triple bottom line indicators.

MARKETING SEGMENT In the marketing segment convince us that a market exists, that sales projections can be achieved and that the competition can be beaten. This part is critical because almost all subsequent sections of the plan depend on the sales estimates developed here. Present market research and analyses that will convince investors that the venture’s sales estimates are accurate and attainable. The following are aspects of marketing that should be addressed when developing a comprehensive exposition of the market.

Marketing vision Here is where you sum up your goals, purpose and vision. Business goals might include annual revenue, number of new customers, etc. Strategic goals can include capturing a certain market share, being seen as the industry leader, being acquired or obtaining a level of customer satisfaction. Try to fill this statement with as much passion as possible. Don’t hesitate also to list your personal goals.

Market size and trends Tell us about your niche, that is, all the people who have a need for or whose ‘pain’ can be solved by the product or service. Address the bases of customer purchase decisions – price, quality, service,

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personal contacts or some combination of these factors. Next, list potential customers who have expressed interest in the product or service, together with an explanation of their interest. If it is an existing business, the current principal customers should be identified and the sales trend should be discussed. A review of market trends should be included and any differences between past and projected annual growth rates should be explained. The sources of all data and methods used to make projections should be indicated. If any major customers are willing to make any pre-release purchase commitments, they should be identified.

Competitor analysis Tell us about the strengths and weaknesses of the competing products or services. Compare competing products or services on the basis of price, performance, service, warranties and other pertinent features. What are the advantages and disadvantages of competing products and services and why they are not meeting customer needs? Any knowledge of competitors’ actions that could lead to new or improved products and an advantageous position also should be presented. Finally, give us a review of competing companies, or the companies that you want to emulate. Each competitor’s share of the market, sales and distribution and production capabilities should be discussed. Attention should be focused on profitability and the profit trend of each competitor. Who is the pricing leader? Who is the quality leader? Who is gaining? Who is losing? Have any companies entered or dropped out of the market in recent years?

Remarkable difference How do you differentiate yourself in a short, powerful claim? What is the core message to quickly communicate this difference? Here is a list of possible differentiators: unique product; unique service; market niche; special offer; solve a specific problem; message of value; unique habit; unique packaging; outrageous guarantee; customer service compared against the competition; or a way of doing business.

Marketing strategy What is your marketing strategy? The marketing strategy is a business’s approach to marketing its products and services expressed in broad terms, which forms the basis for developing a marketing plan. Your marketing philosophy and approach is developed from market research and evaluation data and should include: (1) customers to be targeted by the initial intensive selling effort, (2) groups to be targeted for later selling efforts, (3) methods of identifying and contacting potential customers in these groups, (4) the features of the product or service (quality, price, delivery, warranty and so on) to be emphasised to generate sales and (5) any innovative or unusual marketing concepts that will enhance customer acceptance (for example, leasing where only sales were previously attempted).

Branding elements Any time a client or potential client comes into contact with your firm he/she is experiencing your firm’s brand or style. What are the visual elements that will help support your marketing strategy? Even if these are going through revisions, show the details of your image.

Pricing rationale The price point must be right in order to penetrate the market, maintain a market position and produce profits. Discuss a number of pricing strategies and choose one convincingly. Compare it to major competitors. Discuss the gross profit margin between manufacturing and final sales costs and show that this margin is large enough to allow for distribution, sales and warranty and service

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expenses; for amortisation of development and equipment costs; and for profit. Justify any price increases over competitors based on newness, quality, warranty or service.

Marketing materials State that you have created ways to reach your target market using physical and electronic means. Don’t stop at printed materials. Think about all the ways your ideal client might do research on a firm like yours. List the contents of your Marketing Kit plus any case studies you have collected. These do not go in the body of the Plan but perhaps in an Appendix. For manufactured products, prepare your product sheets and promotional literature, plans for trade shows, advertisements, direct mailings, social media and Internet, and the use of advertising agencies. For products and services in general, a discussion of the advertising and promotional campaign contemplated to introduce the product and the kind of sales aids to be provided to dealers should be included.

Advertising and promotions The schedule and cost of promotion and advertising should be presented and, if advertising will be a significant part of the expenses, an exhibit showing how and when these costs will be incurred should be included. Your advertising must be targeted, direct response and measurable. Once you have an idea of the different advertising options, their cost and their relevance to your target markets, create an advertising plan in this topic based on your desired results and budget.

Web plan Your website can educate, persuade and motivate your prospects to take action. But, it can also provide a much richer set of benefits as well. What do you need your website to do for you?

Sales strategy and forecast You want your sales plan to explain the steps you follow to close a sale. How you reward your salespeople; do they receive a commission for each sale? How you process and track the order once it’s received. How you keep in contact with your customers throughout the sales process. Next comes your sales forecast. Put into words how you decided on the numbers in your sales forecast. What growth rates are you expecting? Why are you projecting your sales at this level? Why not less or more? What are the main driving forces behind the sales forecast? How does it relate to your market analysis, your main target segments, your sales strategy and marketing strategy? Is your sales forecast believable? Why? What events might turn the sales forecast downward? What kind of things are you assuming will happen to make sure the sales happen?

HOW TO GATHER COMPETITIVE INTELLIGENCE IN THE ASIA–PACIFIC In many countries (such as Australia and New Zealand) it is relatively easy to get information on publicly held companies. Most information is in the public domain on the Internet, such as annual reports, sales reports, and company profiles from commerce departments or brokerage houses. But in developing countries of the Asia–Pacific, competitor intelligence – information on competitors, their products, and how they do business – is not easy to come by. You need to engage in a little ‘espionage’ to gather competitor intelligence. Here’s how: •

ENTREPRENEURSHIP IN PRACTICE

Check with your own government agencies such as commerce or trade to see if any printed information is available.

cont.

»

602 Part 4: Growth strategies for entrepreneurial ventures cont.

• • •

•

• • • •

Ask those who have contact with your customers, such as the sales force; they are the eyes and ears of your social enterprise. They interface directly with customers and often have contact with competitors’ salespeople. Preferences are about the products/services and the company they are purchasing from. Talk directly to the competitors’ senior management or owners. You might be surprised by what information you can gain simply by asking, especially if you are a small social enterprise. A competitor may not see your enterprise as a threat and give you information (and maybe some free advice, too). Contact low-level employees working for competitors, like support staff, guards, or chauffeurs. They are usually happy to be asked to share their opinions and observations and often do so readily. Chauffeurs and secretaries, especially, may be privy to conversations with important decision makers. Competitors’ former employees are a good source of information; the more disgruntled they were at the time they left, the better for you. Ask your staff members whether any of them have worked for the competition. You might be surprised at how often this is the case and how often they are overlooked as internal resources. Ask people in your industry what they know about your competitors. For instance, your raw material suppliers might also sell to your competitors. Maybe they have seen a competitor’s site and facilities during a previous delivery. Network with friends and family members; if you ask enough people you are bound to find someone who knows something. For example, in a hotel restaurant, an employee met a personal friend of the major competitor. The conversation yielded a lot of information on the family’s business philosophy and strategy. One tidbit disclosed was that the company’s matriarch and president had died the prior week – was this an opportunity or a threat?

A note on ethics: Gather competitive intelligence in an ethical manner. Don’t misrepresent who you are or your intentions. For example, don’t call a competitor posing as a job applicant, market researcher, or supplier. Companies are good about protecting domains that are proprietary, but you will be surprised at how much information is forthcoming when you merely ask. Besides, the bulk of the information you will need for your competitive analysis is not industry trade secrets. Source: Sutia Kim, Alter, ‘Managing the double bottom line: A business planning reference guide for social enterprises’, Save the Children, 115, http://www.virtueventures.com/files/mdbl-preface.pdf. Copyright ª 2000 Sutia Kim Alter, published by Virtue Ventures LLC.

RESEARCH, DESIGN AND DEVELOPMENT If appropriate, be sure to cover any research, design and development in regard to cost, time and special testing. Investors need to know the status of the project in terms of prototypes, lab tests and scheduling delays. Blueprints, sketches, drawings and models often are important. It is equally important to identify the design or development work that still needs to be done and to discuss possible difficulties or risks that may delay or alter the project. In this regard, a developmental budget that shows the costs associated with labour, materials consulting, research, design and the like should be constructed and presented.

OPERATIONS Describe the location of the new venture in terms of labour availability, wage rate, proximity to suppliers and customers and community support. In addition, local taxes and zoning requirements should be sorted out and the support of area banks for new ventures should be touched on. Discuss any specific needs such as warehouse storage and offices as well as equipment needs (special tooling, machinery, computers and vehicles). Other factors that might be considered are the suppliers (number and proximity) and the transportation costs involved in shipping materials. Finally, cost data associated with any of the operation factors should be presented. The financial information used here can be applied later to the financial projections.

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COMMON BUSINESS PLANNING MISTAKES Entrepreneurs endure uncertainty in almost everything they do. From hiring the right ENTREPRENEURSHIP employees to finding reliable suppliers, building a business requires an entrepreneur to handle significant pressure on a daily basis. Given the variability which is inherent in any new venture, a business plan is crucial for effective management. In spite of the importance of business IN PRACTICE planning, few activities are more daunting for entrepreneurs than formalising their thoughts on paper. In order for entrepreneurs to stay driven to succeed, they have to remain optimistic, so the fear of discovering some insurmountable obstacle while planning leads some management teams to avoid the process altogether. Whether the business is a start-up or a well-established corporation, a business plan, when done correctly, serves as the company’s blueprint to ensure that all parties involved are in agreement regarding the business’s overarching purpose. In the business plan sections listed below we present some of the common mistakes that entrepreneurs make when developing their plan. Overall mistakes • Entrepreneurs are unable to clearly articulate their vision in the plan. • Entrepreneurs fail to provide sufficient details regarding the implementation of their strategy. • Entrepreneurs ineffectively present the goals and objectives that are most important to the business’s success. • Entrepreneurs do not convincingly present the basis for their strategy. • Entrepreneurs do not improve their plan based on the feedback from investors. Executive summary • Entrepreneurs are not precise about their needs and capabilities. • Entrepreneurs waste words with fillers and superfluous information. Management • Entrepreneurs forget to include their previous successes and or failures. • Entrepreneurs dismiss the importance investors place on an experienced management team. Marketing • Entrepreneurs rely heavily on secondary market research rather than soliciting the opinions of their potential customers. • Entrepreneurs claim the percentage of the market their company will own without research support. Financials • Entrepreneurs overlook and, in turn, underestimate their cash-flow requirements. • Entrepreneurs inflate or understate their margins in order to arrive at their ideal profitability. Source: Adapted from Henricks, M. (2007), ‘Build a better business plan’, Entrepreneur magazine website, http://www.entrepreneur.com/ startingabusiness/businessplans/article174002.html; Andrew J. Sherman, Grow fast, grow right: 12 strategies to achieve breakthrough business growth (Chicago: Kaplan Publishing, 2007), pp. 20–6; and Jay Snider, ‘Don’t make these 5 business plan mistakes’, Up and Running Blog, http://upandrunning.bplans.com/2012/04/20/dont-make-these-5-business-plan-mistakes.

MANAGEMENT This segment identifies the key personnel, their positions and responsibilities and the career experiences that qualify them for those particular roles. Two-page re´sume´s should be provided for each member of the management team in the Appendix. Also, this section is where the entrepreneur’s role in the venture should be clearly outlined. Finally, any advisers, consultants or members of the board should be identified and discussed. The structure of payment and ownership (share agreements, consulting fees and so on) should be described clearly in this section. The reader should easily grasp: (1) organisational structure, (2) management team and critical personnel, (3) experience and technical

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capabilities of the personnel, (4) ownership structure and compensation agreements and (5) board of directors and outside consultants and advisers.

FINANCIAL The financial segment of a business plan must demonstrate the potential viability of the undertaking.

Start-up funding Use this topic to describe your Start-up Funding table, which is linked to your Executive Summary. Explain where your funding will come from, as investments and/or loans, and how this funding will cover the start-up requirements outlined in a Start-up Funding table.

Important assumptions In the financial segment it is important to mention any assumptions used for preparing the figures. Nothing should be taken for granted. Also, it should include how the statements were prepared (by a professional accountant or by the entrepreneur) and who will be in charge of managing the business’s finances. Assumptions include interest rates your business will use for loans (both short-term and long-term loans, which often have different interest rates), and also the tax percentage which will be applied towards your company’s profits.

Break-even analysis A break-even chart shows the level of sales (and production) needed to cover all costs. This includes costs that vary with the production level (manufacturing labour, materials, sales) and costs that do not change with production (rent, interest charges, executive salaries). The break-even point helps a business see how much sales are needed to cover costs and expenses in order to start making a profit. For a start-up company, you should compare the break-even point with your sales prospects.

Profit and loss Talk about the totals in your P&L as well as the expenses you included. If you are a new company, do you estimate losses in the first few months? At what point do you show a profit? Did you use a percentage increase for your sales? If so, what percentage did you use? Do you have any large, onetime expenses planned, beyond your ongoing expenses? What are they, and when do they happen?

Cash-flow statement The cash-flow statement may be the most important document since it sets forth the amount and timing of expected cash in-flows and out-flows. This section of the business plan should be carefully constructed. Given a level of projected sales and capital expenditures over a specific period, the cash-flow forecast will highlight the need for and the timing of additional financing and will indicate peak requirements for working capital. Management must decide how this additional financing is to be obtained, on what terms and how it is to be repaid. The total amount of needed financing may be supplied from several sources – part by equity financing, part by bank loans and the balance by short-term lines of credit from banks. This information becomes part of the final cash-flow forecast.

The pro forma balance sheet Pro forma means ‘projected’, as opposed to actual. The pro forma balance sheet projects what the financial condition of the venture will be at a particular point in time. Pro forma balance sheets should be prepared at start-up, semi-annually for the first years and at the end of each of the first

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three years. The balance sheet details the assets required to support the projected level of operations and shows how these assets are to be financed (liabilities and equity). Investors will want to look at the projected balance sheets to determine if debt/equity ratios, working capital, current ratios, inventory turnover and so on are within the acceptable limits required to justify the future financings projected for the venture.

CRITICAL RISKS SEGMENT In this segment potential risks should be identified, such as effect of unfavourable trends in the industry, design or manufacturing costs that have gone over estimates, difficulties of long lead times encountered when purchasing parts or materials and unplanned-for new competition. As far as sustainability is concerned, regulatory risks are often cited, followed by weather-related physical risks and reputational risks. In addition to these risks, it is wise to cover the what-ifs. For example, what if the competition cuts prices, the industry slumps, the market projections are wrong, the sales projections are not achieved, the patents do not come through or the management team breaks up? What if the temperature in Victoria increases by 1 degree Celsius in the summer? (See Table 16.4.) TABLE 16.4

SMALL CLIMATE CHANGES CAN DRAMATICALLY INCREASE RISKS

HAZARD

CHANGE IN CLIMATE

RESULTING CHANGE IN HAZARD

Cyclone

2.2C mean temperature increase

Increase of 5–10 per cent in cyclone wind speeds

Bushfire

1C mean summer temperature increase

17–28 per cent increase in bushfires

Drought

1.3C maximum temperature increase

25 per cent increase in evaporation leading to increased bushfire risk

Floods

25 per cent increase in 30-minute precipitation

One in 100-year flood becomes one in 17-year flood

Source: Mills, E., Lecomte, E. & Peara, A. (2001). US insurance industry perspectives on climate change. US Dept of Energy, Berkeley, California, cited in Tony Coleman, Chairman, Ark – Australia’s First Carbon Fund. (2008). Climate change: An investor’s perspective. Presented at ‘The Low Carbon Economy: Risks and Opportunities for the Financial Services Industry’, Institute of Actuaries of Australia, Copyright ª 2008 by The Institute of Actuaries of Australia. Used by permission.

Finally, suggestions for alternative courses of action should be included. Certainly, delays, inaccurate projections and industry slumps all can happen and people reading the business plan will want to know that the entrepreneur recognises these risks and has prepared for such critical events.

HARVEST STRATEGY SEGMENT Every business plan should provide insights into the future harvest strategy. It is important for the entrepreneur to plan the orderly transition of the venture as it grows and develops. This section needs to deal with such issues as management succession and investor exit strategies. In addition, some thought should be given to change management – that is, the orderly transfer of the company assets if ownership of the business changes, continuity of the business strategy during the transition and designation of key individuals to run the business if the current management team changes. With foresight, entrepreneurs can keep their dreams alive, ensure the security of their investors and usually

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strengthen their businesses in the process. For this reason, a written plan for succession of your business is essential. (See Chapter 7, pages 240–1 on harvesting the value of a business.)

MILESTONE SCHEDULE The milestone schedule segment provides investors with a timetable for the various activities to be accomplished. It is important to demonstrate that realistic timeframes have been planned and that the interrelationship of events within these time boundaries is understood. Milestone scheduling is a step-by-step approach to illustrating accomplishments in a piecemeal fashion. These milestones can be established according to any appropriate timeframe, such as quarterly, monthly or weekly. Be sure to coordinate the timeframe not only with early activities like product design and development, sales projections, management team, production and marketing, but also with later activities such as: • incorporation of the venture • completion of design and development • completion of prototypes • hiring of sales representatives • product display at trade shows • signing up distributors and dealers • ordering production quantities of materials • receipt of first orders • first sales and first deliveries (dates of maximum interest because they relate directly to the venture’s credibility and need for capital) • payment of first accounts receivable (cash in). These items are examples of the types of activities that should be included in the milestone schedule segment. The more detailed the schedule, the better the chance the entrepreneur can persuade potential investors that they have thought things out and that they are, therefore, a good risk.

APPENDIX AND/OR BIBLIOGRAPHY The final segment is not mandatory (most plans have it), but it allows for additional documentation that is not appropriate in the main parts of the plan. Diagrams, blueprints, financial data, re´sume´s of management team members and any bibliographical information that supports the other segments of the plan are all examples of material that can be included. It is up to the entrepreneur to decide which, if any, items to put into this segment. However, the material should be limited to relevant and supporting information. To summarise this approach, and to provide a tick list of activities, Table 16.5 provides an important recap of the major segments of a business plan, using helpful hints as practical reminders for entrepreneurs. Table 16.6 is a judge’s checklist used in business plan competitions. Compare the judge’s checklist to the business plan in the Appendix.

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TABLE 16.5

HELPFUL HINTS FOR DEVELOPING THE BUSINESS PLAN

I

Executive summary • No more than three pages. This is the most crucial part of your plan because you must capture the reader’s interest. • What, how, why, where and so on must be summarised. • Complete this part after you have a finished business plan. II Business description segment • The name of your business. • A background of the industry with history of your company (if any) should be covered here. • The potential of the new venture should be described clearly. • Any uniqueness or distinctive features of this venture should be clearly described. III Sustainability • Craft a definition of sustainable development that is specific to your firm and that can serve as a guidepost for business conduct. Describe how you will deal with post-use waste. IV Marketing segment • Convince investors that sales projections and competition can be met. • Use and disclose market studies. • Identify target market, market position and market share. • Evaluate all competition and specifically cover why and how you will be better than your competitors. • Identify all market sources and assistance used for this segment. • Demonstrate pricing strategy since your price must penetrate and maintain a market share to produce profits. Thus the lowest price is not necessarily the best price. • Identify your advertising plans with cost estimates to validate proposed strategy. V Operations segment • Describe the advantages of your location (zoning, tax laws and wage rates). List the production needs in terms of facilities (plant, storage, office space) and equipment (machinery, furnishings, supplies). • Describe the access to transportation (for shipping and receiving). • Indicate proximity to your suppliers. • Mention the availability of labour in your location. • Provide estimates of operation costs – be careful; too many entrepreneurs underestimate their costs. VI Sustainable development measures of performance • Simply ask, ‘How do we meet the needs of the present without compromising the ability of future generations to meet their own needs?’ • ’Do stakeholders raise sustainability issues about the firm?’ • Write a section on the laws, regulations and agreements that have strategic significance on the firm or its stakeholders. Show

VII

VIII

IX

X

XI

XII

how you fit in the framework that many countries are using to form policy approaches and objectives for the management of post-use materials. • Explain the process your firm might implement to reasonably estimate sustainability impacts, risks and opportunities. Management segment • Supply re´sume´s of all key people in the management of your venture. • Carefully describe the legal structure of your venture (sole proprietorship, partnership or corporation). • Cover the added assistance (if any) of advisers, consultants and directors. • Give information on how and how much everyone is to be compensated. Financial segment • Give actual estimated statements. • Describe the needed sources for your funds and the uses you intend for the money. • Develop and present a budget. • Create stages of financing for purposes of allowing evaluation by investors at various points. Critical risks segment • Discuss potential risks before investors point them out – for example: • Price cutting by competitors. • Any potentially unfavourable industry-wide trends. • Physical, regulatory or reputational risks due to climate change. • Design or manufacturing costs in excess of estimates. • Sales projections not achieved. • Product development schedule not met. • Difficulties or long lead times encountered in the procurement of parts or raw materials. • Greater than expected innovation and development costs to stay competitive. • Provide some alternative courses of action. Harvest strategy segment • Outline a plan for the orderly transfer of company assets (ownership). • Describe the plan for transition of leadership. • Mention the preparations (insurance, trusts and so on) needed for continuity of the business. Milestone schedule segment • Develop a timetable or chart to demonstrate when each phase of the venture is to be completed. This shows the relationship of events and provides a deadline for accomplishment. Appendix or bibliography

Source: Donald F. Kuratko, The complete entrepreneurial planning guide, Copyright ª 2013 by Kelley School of Business, Indiana University, Bloomington. Used by permission.

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TABLE 16.6

BUSINESS PLAN ASSESSMENT – COMPLETE EVALUATION OF EACH COMPONENT (JUDGE’S CHECKLIST FOR BUSINESS PLAN COMPETITION)

THE COMPONENTS

There are twelve components of a business plan. As you develop your plan, you should assess each component. Be honest in your assessment since the main purpose is to improve your business plan and increase your chances of success. For instance, if your goal is to obtain external financing, you will be asked to submit a complete business plan for your venture. The business plan will help a funding source to more adequately evaluate your business idea. Assessment directions: The brief description of each component will help you write that section of your plan. After completing your plan, use the scale provided to assess each component. 5

4

3

2

1

Outstanding Thorough and complete in all areas

Very good Most areas covered, but could use improvement in detail

Good Some areas covered in detail, but other areas missing

Fair A few areas covered, but very little detail

Poor No written parts

THE 12 COMPONENTS OF A BUSINESS PLAN

1 Executive summary. This is the most important section because it has to convince the reader that the business will succeed. In no more than three pages, you should summarise the highlights of the rest of the plan. This means that the key elements of the following components should be mentioned. The executive summary must be able to stand on its own. It is not simply an introduction to the rest of the business plan, but rather discusses who will purchase your product or service, what makes your business unique and how you plan to grow in the future. Because this section summarises the plan, it is often best to write it last. Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

2 Description of the business. This section should provide background information about your industry, a history of your company, a general description of your product or service and your specific mission that you are trying to achieve. Your product or service should be described in terms of its unique qualities and value to the customer. Specific short-term and long-term objectives must be defined. You should clearly state what sales, market share and profitability objectives you want your business to achieve. Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a What type of business will you have? b What products or services will you sell? c Why does it promise to be successful? d What is the growth potential? e How is it unique? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

3 Sustainability. This section gives the reader an idea of your definition of sustainability and the performance measures you intend to take. It should also contain a list of practices you will implement. Be sure that you have a definition of sustainable development that is specific to your firm. Keep this short, practical and specific.

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TABLE 16.6

BUSINESS PLAN ASSESSMENT – COMPLETE EVALUATION OF EACH COMPONENT (JUDGE’S CHECKLIST FOR BUSINESS PLAN COMPETITION) (Continued )

Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a What does sustainability mean to your business? b Have you included a description of the performance measures? c Have you included a list of the practices you will implement? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

4 Marketing. There are two major parts to the marketing section. The first part is research and analysis. Here, you should explain who buys the product or service – in other words, identify your target market. Measure your market size and trends and estimate the market share you expect. Be sure to include support for your sales projections. For example, if your figures are based on published marketing research data, be sure to cite the source. Do your best to make realistic and credible projections. Describe your competitors in considerable detail, identifying their strengths and weaknesses. Finally, explain how you will be better than your competitors. The second part is your marketing plan. This critical section should include your market strategy, sales and distribution, pricing, advertising, promotion and public awareness efforts. Demonstrate how your pricing strategy will result in a profit. Identify your advertising plans and include cost estimates to validate your proposed strategy. Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a Who will be your customers? (target market) b How big is the market? (number of customers) c Who will be your competitors? d How are their businesses prospering? e How will you promote sales? f What market share will you want? g Do you have a pricing strategy? h What advertising and promotional strategy will you use? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

5 Operations. In this segment you describe the actual operations and outline their advantages. Zoning, taxes, access to transportation and proximity to supplies should all be considered in this section. Key elements a Have you identified a specific location?

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

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TABLE 16.6

BUSINESS PLAN ASSESSMENT – COMPLETE EVALUATION OF EACH COMPONENT (JUDGE’S CHECKLIST FOR BUSINESS PLAN COMPETITION) (Continued )

b Have you outlined the advantages of this location? c Any zoning regulations or tax considerations? d Will there be access to transportation? e Will your suppliers be conveniently located? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

6 Sustainability measures. Here you have a section on the firm’s impacts on the environment and on stakeholders. Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a Is there a section on stakeholder interests and impacts? b Does the plan address whether regulations (present and potential) can have an impact on the firm? c Is there a section describing how the firm will address sustainability impacts, risks and opportunities? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

7 Management. Start by describing the management team, their unique qualifications, and your plans to compensate them (including salaries, employment agreements, stock purchase plans, levels of ownership and other considerations). Discuss how your organisation is structured; consider including a diagram illustrating who reports to whom. Also include a discussion of the potential contribution of the board of directors, advisers or consultants. Finally, carefully describe the legal structure of your venture (sole proprietorship, partnership or corporation). Key elements a Who will manage the business? b What qualifications do you have? c How many employees will you have? d What will they do? e How much will you pay your employees and what type of benefits will you offer them? f What consultants or specialists will you use? g What legal form of ownership will you have? h What regulations will affect your business?

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

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TABLE 16.6

BUSINESS PLAN ASSESSMENT – COMPLETE EVALUATION OF EACH COMPONENT (JUDGE’S CHECKLIST FOR BUSINESS PLAN COMPETITION) (Continued )

Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

8 Financial. Three key financial statements must be presented: a balance sheet, an income statement and a cashflow statement. These statements typically cover a one-year period. Be sure you state any assumptions and projections made when calculating the figures. Determine the stages where your business will require external financing and identify the expected financing sources (both debt and equity sources). Also, clearly show what return on investment these sources will achieve by investing in your business. The final item to include is a break-even analysis. This analysis should show what level of sales will be required to cover all costs. If the work is done well, the financial statements should represent the actual financial achievements expected from your business plan. They also provide a standard by which to measure the actual results of operating your business. They are a very valuable tool to help you manage and control your business. Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a What is your total expected business income for the first year? Quarterly for the next two years? (forecast) b What is your expected monthly cash flow during the first year? c Have you included a method of paying yourself? d What sales volume will you need to make a profit during the three years? e What will be the break-even point? f What are your projected assets, liabilities and net worth? g What are your total financial needs? h What are your funding sources? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

9 Critical risks. Discuss potential risks before they happen. Here are some examples: price cutting by competitors, potentially unfavourable industry-wide trends, design or manufacturing costs that could exceed estimates, and sales projections that are not achieved. The idea is to recognise risks and identify alternative courses of action. Your main objective is to show that you can anticipate and control (to a reasonable degree) your risks. Be sure to include a section on climate change risks (physical, regulatory and reputational). Key elements a What potential problems have you identified? b Have you calculated the risks? c What alternative courses of action exist?

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

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TABLE 16.6

BUSINESS PLAN ASSESSMENT – COMPLETE EVALUATION OF EACH COMPONENT (JUDGE’S CHECKLIST FOR BUSINESS PLAN COMPETITION) (Continued )

Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

10 Harvest strategy. Ensuring the survival of a venture is hard work. A founder’s protective feelings for an idea built from scratch make it tough to grapple with issues such as management succession and harvest strategies. With foresight, however, an entrepreneur can keep the dream alive, ensure the security of his or her venture, and usually strengthen the business in the process. Thus a written plan for succession of your business is essential. Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a Have you planned for the orderly transfer of the venture assets if ownership of the business is passed to this corporation? b Is there a continuity of business strategy for an orderly transition? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

11 Milestone schedule. This section is an important segment of the business plan because it requires you to determine what tasks you need to accomplish to achieve your objectives. Milestones and deadlines should be established and monitored on an ongoing basis. Each milestone is related to all others, and together all of them provide a timely representation of how your objective is to be accomplished. Key elements

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

a How have you set your objectives? b Have you set deadlines for each stage of your growth? Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

12 Appendix. This section includes important background information that was not included in the other sections. It is where you would put such items as re´sume´s of the management team, names of references and advisers, drawings, documents, licences, agreements, and any materials that support the plan. You may also wish to add a bibliography of the sources from which you drew information. Key elements a Have you included any documents, drawings, agreements or other materials needed to support the plan? b Are there any names of references, advisers or technical sources you should include? c Are there any other supporting documents?

Have you covered this in the plan?

Is the answer clear? (yes or no)

Is the answer complete? (yes or no)

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TABLE 16.6

BUSINESS PLAN ASSESSMENT – COMPLETE EVALUATION OF EACH COMPONENT (JUDGE’S CHECKLIST FOR BUSINESS PLAN COMPETITION) (Continued )

Rate this component: 5

4

3

2

1

Outstanding

Very good

Good

Fair

Poor

SUMMARY: YOUR PLAN

Directions: For each of the business plan sections that you assessed earlier, circle the assigned points on this review sheet and then total the circled points. COMPONENTS

POINTS

1

Executive summary

5

4

3

2

1

2

Description of the business

5

4

3

2

1

3

Sustainability

5

4

3

2

1

4

Marketing

5

4

3

2

1

5

Operations

5

4

3

2

1

6

Sustainability measures

5

4

3

2

1

7

Management

5

4

3

2

1

8

Financial

5

4

3

2

1

9

Critical risks

5

4

3

2

1

10

Harvest strategy

5

4

3

2

1

11

Milestone schedule

5

4

3

2

1

12

Appendix

5

4

3

2

1

Total points: Scoring:

50 pts:

Outstanding! The ideal business plan. Solid!

45–49 pts:

Very good.

40–44 pts:

Good. The plan is sound with a few areas that need to be polished.

35–39 pts:

Above average. The plan has some good areas but needs improvement before presentation.

30–34 pts:

Average. Some areas are covered in detail yet other areas show weakness.

20–29 pts:

Below average. Most areas need greater detail and improvement.

Below 20 pts:

Poor. Plan needs to be much better researched and documented.

Source: Expanded on Donald F. Kuratko, The Complete Entrepreneurial Planning Guide, Copyright ª 2013 by Kelley School of Business, Indiana University, Bloomington. Used by permission.

614 Part 4: Growth strategies for entrepreneurial ventures

UPDATING THE BUSINESS PLAN When to stray from your business plan? Strict adherence to the plan is dangerous! Learn what it takes on CourseMate Express.

The business plan should serve as a planning tool to help guide the start-up and execution of a new venture. Once the venture is started, the business plan is still a vital tool for planning continued growth and/or profitability. There are several reasons to update the business plan, and they are outlined below. • Financial changes. Update your plan on at least a yearly basis to project financials and plan for fiscal needs. • Additional financing. If continued capital is needed, an updated business plan needs to reflect the current numbers and not the ones projected before the venture was started. • Changes in the market. Changes in the customer base and competition should be tracked and strategised with regard to how they might affect your venture. • Launch of a new product or service. Updating the business plan is an essential method to assess the feasibility of any proposed new product or service and determine its viability. • New management team. Any new members of the management team should develop their own plan to initiate strategies for growth. • Reflect the new reality. Business plans are written based on estimated numbers and projections that may not be accurate after the venture has started. Business plans should be updated to reflect the new reality that the entrepreneur experiences.30

PRESENTATION OF THE BUSINESS PLAN: THE ‘PITCH’ Once a business plan is prepared, the next major challenge is presenting the plan to either a single financial person or, in some parts of the country, a forum at which numerous financial investors have gathered. The oral presentation – commonly known as an elevator pitch (because of the analogy of riding an elevator and having only two minutes to get your story told to another person in the elevator) – provides the chance to sell the business plan to potential investors. The presentation should be organised, well prepared, interesting and flexible. Entrepreneurs should develop an outline of the significant highlights that will capture the audience’s interest. Although the outline should be followed, they also must feel free to add or remove certain bits of information as the presentation progresses – a memorised presentation lacks excitement, energy and interest. An entrepreneur should use the following steps to prepare an oral presentation: • Know the outline thoroughly. • Use keywords in the outline that help recall examples, visual aids or other details. • Rehearse the presentation to get a feel for its length. • Be familiar with any equipment to be used in the presentation – use your own laptop. • The day before, practise the complete presentation by moving through each slide.

SUGGESTIONS FOR PRESENTATION Entrepreneurs are naturally anxious to tell (and sell) their story. However, most venture capitalists agree that the content should be focused and the delivery should be sharp. In the content of the presentation it is important to be brief and to the point, to summarise the critical factor or unique ‘hook’ of your venture up front, and to use no more than 12 to 15 PowerPoint slides. Following are some key suggestions about the actual delivery of the pitch to prospective investors.

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• Focus on the consumer pain for which your venture will be the solution. Investors want to know exactly what problem is being solved by your venture. Pinpoint the target of your solution. • Demonstrate the reachable market. Instead of a dramatic potential market, outline the immediate reachable group of customers that will be targeted. • Explain the business model. How this venture is designed to make money is critical to investors. Demonstrating a clear method of getting to the market for sales will indicate a successful beginning to the new venture. • Tout the management team. Every investor wants to know the skills and ability of the venture’s team to deliver and operationalise the concept. Emphasise the experienced people on your team as well as any technical advisers who are on board. • Explain your metrics. Rather than using generic assumptions, such as the famous ‘1% rule’ (when someone claims that he or she will simply get 1 per cent of a huge market with no research to back up the claim), highlight the metrics that were used to calculate any revenue projections. • Motivate the audience. The entire purpose of a venture pitch is to move the audience to the next step – another meeting to discuss everything in detail. Therefore, you must remember that enthusiasm is hugely important. The investors must believe that you are excited before they can be excited. • Why you and why now? The final point must answer the daunting questions in the minds of the investors: Why are you the right venture and why is this the right time for it to be launched? Be confident in yourself and your team. Always demonstrate a timeline to show the speed with which your venture plans to capture a significant market.31

WHAT TO EXPECT Entrepreneurs should realise that the audience reviewing their business plan may be disinclined to listen. Potential funders apply pressure to test the entrepreneur’s venture, as well as the entrepreneurs themselves. So, entrepreneurs must expect and prepare for a critical, sometimes sceptical, audience of financial sources. When you make your pitch and submit your business plan, the funder will listen and then glance at the plan briefly before beginning any initial comments. No matter how good you think your plan is, an investor is not going to look at it and say, ‘This is the greatest business plan I’ve ever seen!’ Do not expect enthusiastic acceptance or even polite praise. It’s highly likely that the remarks will be critical and even if they aren’t they’ll seem that way. Don’t panic. Even if it seems like an avalanche of objections, bear in mind that some of the best venture capital deals of all time faced the same opposition. Never expect results in 20 minutes. Each pitch will be a learning experience that will build your confidence for the next one. Entrepreneurs must be prepared to handle the questions from the evaluators and learn from the criticism. They should never feel defeated but rather should make a commitment to improving the business plan for future review. Table 16.7 outlines some of the key questions that might be asked when a business plan is turned down. Entrepreneurs should use the answers to these questions to revise, rework and improve their business plan. The goal is not so much to succeed the first time as it is to succeed.32

616 Part 4: Growth strategies for entrepreneurial ventures

TABLE 16.7

WHAT TO DO WHEN A FUNDER TURNS YOU DOWN – 10 QUESTIONS

EVENT

QUESTIONS TO ASK

Confirm the decision

‘That means you do not wish to participate at this time?’

Sell for the future

‘Can we count you in for the second round of financing, after we’ve completed the first?’

Find out why you were rejected

‘Why do you choose not to participate in this deal?’ (Timing? Fit? All filled up?)

Ask for advice

‘If you were in my position, how would you proceed?’

Ask for suggestions

‘Can you suggest a source who invests in this kind of deal?’

Get the name

‘Whom should I speak to when I’m there?’

Find out why

‘Why do you suggest this firm and why do you think this is the best person to speak to there?’

Work on an introduction

‘Who would be the best person to introduce me?’

Develop a reasonable excuse

‘Can I tell him that your decision to turn us down was based on . . ..?’

Know your referral

‘What will you tell him when he calls?’ Source: Mancuso, J. R. (1985), How to write a winning business plan, Englewood Cliffs, NJ: Prentice-Hall, 37. Reprinted with permission of Simon & Schuster Adult Publishing Group, Copyright ª 1985 by Prentice Hall, Inc.

BUSINESS PLANNING RESOURCES

ENTREPRENEURSHIP IN PRACTICE

• • •

• • •

Australian Venture Capital Association Limited: http://www.avcal.com.au > looking for capital? Business.Gov.au: http://www.business.gov.au > business topics > business planning New Zealand Trade and Enterprise, Investment Ready Guide: https://www.nzte.govt.nz/en > export > thinking about exporting > thinking about your export finance > is your business ready for investors? New Zealand Trade and Enterprise, Planning for Success (with excellent templates): https:// www.nzte.govt.nz/en > export > planning-for-success StEP Initiative on e-waste: http://www.step-initiative.org Welcome to Flying Solo, Australia’s solo and micro business community: http://www. flyingsolo.com.au

Source: NSW Small Business, http://www.smallbusiness.nsw.gov.au/supporting-business/small-biz-connect-advisory-program.

A PRACTICAL EXAMPLE: COCOA SAMOA LTD Every new venture should have a business plan; however, many entrepreneurs have no idea about the details required for a complete business plan. An example of an actual business plan is included in Appendix 1, and each part of a business plan discussed earlier in this chapter is illustrated in this detailed example. By carefully reviewing this business plan, you will gain a much better perspective of the final appearance that an entrepreneur’s plan must have.

Chapter 16: Developing a sustainable business plan 617

SUMMARY This chapter provided a thorough definition of a sustainable business plan, and the current need for this approach. Critical planning factors were discussed. The question of business sustainability in the era of climate change (for example, e-waste) was discussed. In reality we have very little understanding of how entrepreneurs discover and develop these opportunities. A business plan was defined and benefits for both entrepreneurs and financial sources were discussed. Developing a wellconceived plan means getting into the right mind-set. One must write it persuasively for a particular audience. You now understand the reading process of a business plan to better understand how to put the plan together. Guidelines in developing a business plan were provided, collated from the advice of experts in venture capital and new-business development. The next section then illustrated some of the major questions that must be answered in a complete and thorough business plan. The business plan was outlined with every major segment addressed and explained. The chapter then presented some helpful hints for preparing a business plan, along with a judge’s checklist used in business plan competitions. The chapter concluded with a review of how to present a business plan to an audience of venture capital sources. Some basic presentation tips were listed, together with a discussion of what to expect from the plan evaluators.

KEY TERMS AND CONCEPTS business plan consumer pain electronic waste elevator pitch five-minute reading

industrial ecology management team marketing segment marketing strategy metrics

Review key terms with interactive flashcards

milestone schedule segment pro forma balance sheet reachable market

REVIEW AND DISCUSSION QUESTIONS 1 2 3 4 5 6 7 8 9 10 11 12 13

What do you believe the difference is between a ‘regular’ business plan and a ‘sustainable’ business plan? What are the different meanings of sustainability in business planning? Is there a preferred definition in the twenty-first century? What are the three major viewpoints to be considered when developing a business plan? Describe how they can conflict. Describe the five-minute reading process that venture capitalists follow when reading a business plan. What are some of the components to consider in the proper packaging of a plan? Identify five guidelines that you would like to use when preparing a business plan. Which are the top ‘deal-killers’ in Table 16.2 ‘Common business plan phrases – statement versus reality’? Briefly describe each of the major segments to be covered in a business plan. Why is the summary segment of a business plan written last? Why not first? Pick a company or industry sector that you know. Can you describe which risks in Table 16.4 would apply to it? What other risks can you name? Under what circumstances would you suggest simply skipping a business plan, and instead developing a lean canvas? Are there any novel or innovative entrepreneurship competitions at your university (see Table 16.1)? Outline some of the critical points to capture in an elevator pitch.

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EXPERIENCING ENTREPRENEURSHIP The one-page idea Many times the entrepreneur is the only person who can see the opportunity. The problem is how to persuade your boss, the banker, your auntie or your classmates, who often have little time, that Activity template available the idea is profitable and sustainable. If you can distil your idea down to one page, you’ll have a online better chance of scoring that support. The example of a one-page idea presented here was based on a new product for the fishing industry. • The product (the Rod Mate) is a fishing rod holder that enables you to hold your outfit above your waist and out of the water and elements. It has five holding applications built in: around the neck, the waist, behind the back, over the shoulder or pinned on the vest. It works with all types of fishing rods. • The market demand is huge and growing at double digits. American Sportfishing Association reports that there are an estimated 44 million US recreational anglers. Sportfishing is growing annually. There are other rod holders on the market, but none have the Rod Mate’s unique features. • Product benefit (Here you tell the audience about the value of the new product/venture.) We all have seen those horrible pictures of a proud angler showing off their prize catch and the tackle they caught it on, wearing a fly rod in their mouth rather than a big smile. Handling a prize game fish for release, or trying to record it in a photograph with tackle in hand sometimes demands the skill of a juggler with three hands while your expensive gear is taking a soaking in the salt or bouncing off the rocks in a trout stream. Rod Mate acts to hold your rod securely, out of harm’s way in several applications, while you release your catch, change flies or pose for that priceless photo of your catch and the tackle used to capture it. • Marketing strategies (Here you tell them how you are going to market your product.) We are going to offer this product via Direct TV or infomercial to anglers. The Rod Mate comes complete with webbed-belt, side-release buckle. We do not know the price as yet. We plan on getting our product into many different media within a very short time and then moving it into the big box retailers after that. • Management team (Here you tell them about your motives, your expertise and the capability of the new venture team.) I have been encouraged to start my own business and came upon this idea after a fishing trip with my father. We fished together for many years. I had just landed a prize trout when I tried to juggle my rod, my tackle and my net. The prizewinning fish got away because I was unable to maintain my balance in the stream and remove the fly from the mouth of my catch. • The raise (This is when you tell them the next steps, how much you think you are going to need to raise and what they can contribute to the new venture. You also include the action step or what you desire to happen as a result of the presentation. This is a very important part of the 90-second pitch.) I am in the early stage of developing my new product. I want to attract others to help me develop my product. I will need to attract outside investors and need to construct an agreement with them. I want to develop a financing plan that provides a ROI on the sales projections. If you are interested in learning more about my product or service, please feel free to give me your business card and we will be glad to set up an appointment to talk with you more. (This is the close, but you need to try to get them to set up an appointment or talk with you after the meeting. It all depends on how the meeting is set up or what type of position you are in when speaking with this person: in an elevator, an airplane, at lunch, in a bar or whatever.) This is a template to learn from and it can be adjusted accordingly. Source: Hackbert, P. H. (2006). The University of Illinois – Academy for Entrepreneurial Leadership, 3rd Annual Conference of the International Society for Exploring Teaching and Learning, 19–21 October.

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CASE STUDIES CASE 16.1 Getting it right by doing it wrong She had no business plan but 10 years later, she is one of New Zealand’s most successful entrepreneurs. When Brigit Blair set up Linden Leaves 10 years ago, she broke the golden rule by setting up without a business plan. ‘A five-year plan?’ she laughs. ‘We didn’t have a five-week plan.’ A decade later, Linden Leaves’ range of New Zealand-made body care products are sold from Melbourne to London and many points in between. Christchurch-based Mrs Blair, 54, is well on the way to becoming a government business adviser’s pin-up, the sort of entrepreneur the government’s jobs ministry loves to champion. ‘I launched without really knowing what I was getting into and without a business plan. I did everything wrong. For four years I exported only to Korea and Japan – probably the most difficult markets in the world. If I had really thought about it, I probably would never have taken the first step. Passion and a good deal of hard work go a long way, I guess.’ Source: King, D. (2004). ‘Getting it right by doing it wrong. The Dominion Post (Wellington), 1 July. Published by The Fairfax New Zealand Limited, ª 2004.

QUESTIONS

1 2

Based on Brigit’s experience, would you still recommend writing a business plan or would you just ‘wing it’? What were the secrets of her success without a business plan?

CASE 16.2 It’s just a matter of time Pedro Santini has been a computer analyst for five years. In his spare time he has developed a word processing software program that is more comprehensive and powerful than any on the market. Since he does not have a great deal of money, Pedro believes the first step in producing and marketing this product should be to get the necessary venture capital. The software program has been written and trial-tested by Pedro and a handful of friends to whom he gave the material. Two of these friends are full-time typists who told him that the program is faster and easier to use than anything on the market. Pedro believes that these kinds of testimonials point out the profit potential of the product. However, he still needs to get financial support. One of Pedro’s friends has suggested a meeting with a venture capitalist. ‘These guys have all sorts of money to lend for new ventures’, the friend told Pedro. ‘All you have to do is explain your ideas and sell them on giving you the money. They are always looking to back a profitable idea and yours is certain to be one of the best they have seen in a long time.’ Pedro agrees with his friend, but believes he should not discuss the matter with a venture capitalist until he has thought through answers to the various types of questions likely to be asked. In particular, Pedro believes he should be able to provide the venture capitalist with projected sales for the first three years and be able to explain the types of expenses that would be incurred. Once he has done this, Pedro feels he will be ready to talk to the individual. ‘Right now’, he told his friend, ‘it’s just a matter of time. I’d think that within seven to 10 days I’ll be ready to present my ideas and discuss financial needs.’ QUESTIONS

1 2 3

In addition to financial questions, what other questions is the venture capitalist likely to ask Pedro? Would a business plan be of any value to Pedro? Why or why not? How would you recommend Pedro get ready for his meeting with the venture capitalist? Be complete in your answer.

CASE 16.3 The incomplete plan When Katrina Bulaong drew up her business plan, she was certain it would help her get financing from her uncle, a famous Philippines industrialist. Katrina is in the throes of putting together a monthly magazine directed towards

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Philippine executive women. The objective of the periodical is to provide information useful to women who are pursuing careers. The first issue is scheduled to go to press in 90 days. Some of the articles included in this issue are ‘Managing your time for fun and profit’, ‘What you need to know about dressing for success’ and ‘Money management: Do it like the experts’. A section also is devoted to successful women at work. It is titled ‘Women in the news’. Other features include a question-and-answer section that responds to letters and inquiries from readers (the first issue’s questions were submitted by a group of women executives, each of whom had been asked to help get the column started by sending in a question), a stock market section that reviews industries or companies and points out the benefits and risks associated with investing in them, and a column on the state of the economy and the developments or trends expected over the next 12 months. Katrina’s business plan consisted of six parts: a summary, a business description, a manufacturing segment, a management segment, a milestone schedule segment and an appendix. When her uncle returned it to her with a polite rejection letter, he wrote: ‘Without a marketing segment, attention to critical risks and a financial segment, this plan is incomplete and cannot be favourably reviewed by me. If you would provide me with this additional information and submit the rewritten plan within the next 60 days, I will be happy to review the plan and give you my opinion within 10 working days’. QUESTIONS

1 2 3 4

What should Katrina put in the marketing segment? What types of information will she need? For the critical-risks assessment segment, what key areas does Katrina have to address? Discuss two of these. For the financial segment, what suggestions would you make to Katrina regarding the kinds of information to include? Be as specific as possible. Do you think there might be some family dynamics involved?

ONLINE STUDY RESOURCES Visit http://login.cengagebrain.com and use the access code that comes with this book for 12 months access to the student resources for this text. The CourseMate Express website contains a range of resources and study tools for this chapter, including: • Interactive chapter quizzes and media quizzes • Experiencing entrepreneurship self-tests and activities • Online video activities, weblinks and more!

SEARCH ME! ACTIVITIES Explore Search me! management for articles relevant to this chapter. Fast and convenient, Search me! management is updated daily and provides you with 24-hour access to full text articles from hundreds of scholarly and popular journals, eBooks and newspapers, including The Australian and The New York Times. Log in to the Search me! management database via http://login.cengagebrain.com and complete the following activities or search using the key terms and concepts listed below. business model business plan 1 2 3

electronic waste elevator pitch

Search (business model) and (entrepreneur) under News. Read the fascinating article by Nicola Clark, ‘Reality TV for the red planet’, New York Times, 9 March 2013, B1(L). What is Bas’ business model for settling humans on Mars? Read Bewayo, E. D. (2010), ‘Pre-start-up preparations: Why the business plan isn’t always written’, Entrepreneurial Executive, 15, pp. 9þ. What is the author’s opinion of the value of business planning? There is a very good short article about Ikea’s and Starbuck’s business models. Read Wighton, D. (24 June 2009), ‘Is Ikea’s business model coming apart?’, The Times (London, England), p. 39.

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ENDNOTES 1 Mancuso, J. R. (1985). How to write a winning business plan. Englewood Cliffs, NJ: Prentice-Hall, 37. Reprinted with permission of Simon & Schuster Adult Publishing Group, Copyright 1985 by Prentice Hall, Inc. 2 Cited in The natural edge, the natural advantage of nations: Business opportunities, innovation & governance in the 21st century. London: Earthscan Publications Ltd, 85, http:// www.naturaledgeproject.net/ NAON1Chapter6.3.aspx. Reproduced by permission and Francis Books UK. 3 IPCC Fifth Assessment Report, Climate Change (2013). The Physical Science Basis. 4 Kiron, D. et al. (2013). How serious is climate change to business? MIT Sloan Management Review, 55(1), 75–6. 5 Nidumolu, R., Prahalad, C. K. & Ranagswami, M. R. (2009). Why sustainability is now the key driver of innovation. International Trade Forum, 4, 10. 6 Hopkins, M. S. (2009). What executives don’t get about sustainability (and further notes on the profit motive). MIT Sloan Management Review, 51(1), 35–40. 7 The natural advantage of nations: Business opportunities, innovation & governance in the 21st century, http:// www.naturaledgeproject.net/ NAONChapter1.1.aspx. 8 Werbach, A. (2011). Learning to be sustainable. Chief Learning Officer, 10(5), 46–9. Published by MediaTec Publishing Inc., ª 2011. 9 Werbach, A. (2011). Learning to be sustainable, 46–49. 10 Bru¨derl, J., Preisendo¨rfer, P. & Ziegler, R. (1992). Survival chances of newly founded business organizations. American Sociological Review, 57(2), 227–42. 11 Frederic Delmar & Scott Shane. (2003). Does business planning facilitate the development of new ventures? Strategic Management Journal, 24(12) (December), 1165. 12 Benson Honig. (2004). Entrepreneurship education: Towards a model of contingency-based business planning. Academy of Management Learning & Education, 3(3) (September), 258.

Entrepreneurship

13 Ferna´ndez-Guerrero, R. et al. (2012). The business plan as a project: an evaluation of its predictive capability for business success. Service Industries Journal, 32(15), 2399–2420. 14 William A. Sahlman. (1997). How to write a great business plan. Harvard Business Review (July/August), 98–108, http://gsl.mit.edu/media/programs/indiabms-summer-2013/materials/how-towrite-a-great-business-plan.pdf 15 David E. Gumpert (2002). Burn your business plan! What investors really want from entrepreneurs. Needham, MA: Lauson Publishing. 16 Osterwalder, Alexander & Yves Pigneur. Business Model Generation [Preview], http://www.businessmodel generation.com/downloads/business modelgeneration_preview.pdf and the book, Business model generation: A handbook for visionaries, game changers, and challengers (John Wiley and Sons, 2010). Also see Steve Blank. Why the lean start-up changes everything. Harvard Business Review, May 2013, https:// hbr.org/2013/05/why-the-lean-start-upchanges-everything. 17 Zimmerman, E. (2014). As start-up strategies evolve, so does role of a business plan. New York Times, 3 December, http://www.nytimes.com/ 2014/12/04/business/smallbusiness/ business-plans-for-start-ups.html. 18 David E. Gumpert (2002). Burn your business plan! 19 Jim Horan. The one page business plan (One Page Business Plan Co.); software at http://www.onepagebusiness plan.com. 20 Cornell, C-J. The metamorphosis of business plan competitions. NCIIA 2014 National Collegiate Inventors and Innovators Alliance, nciia.org; http:// venturewell.org/open2014/presentation/ the-metamorphosis-of-business-plancompetitions. 21 Joseph R. Mancuso (1985). How to write a winning business plan. Englewood Cliffs, NJ: Prentice Hall, 44. 22 See Donald F. Kuratko. (1990/1991). Demystifying the business plan process: An introductory guide. Small Business Forum (Winter), 33–40.

23 Adapted from Henderson, J. W. (1988). Obtaining venture financing. Lexington, MA: Lexington Books, 14–15; and Mancuso, How to write, 43. 24 Henderson, Obtaining venture financing, 15. 25 Stanley R. Rich & David E. Gumpert. (1985). How to write a winning business plan. Harvard Business Review (May/ June), 156–66; see also Colin Mason & Matthew Stark. What do investors look for in a business plan? International Small Business Journal, 22(3) (2004), 227–48. 26 Gerald E. Hills. (1985). Market analysis in the business plan: Venture capitalists’ perceptions. Journal of Small Business Management (January), 38–46; see also Gerald E. Hills, Claes M. Hultman & Morgan P. Miles. The evolution and development of entrepreneurial marketing. Journal of Small Business Management, 46(1) (2008), 99–112. 27 Rich & Gumpert. How to write. 159. 28 Mancuso, How to write, 52; see also Bruce R. Barringer, Preparing Effective business plans: An entrepreneurial approach. Upper Saddle River, NJ: Pearson/Prentice Hall, 2009. 29 See Donald F. Kuratko. (1993). Cutting through the business plan jungle. Executive Female (July/August), 17–27; Andrew Burke, Stuart Fraser & Francis J. Greene. The multiple effects of business planning on new venture performance. Journal of Management Studies, 47(3) (2010), 391–415; and Kuratko, Complete entrepreneurial planning guide. 30 Kuratko, D. F. & Hornsby, J. S. (2009). New venture management: The entrepreneur’s roadmap. Upper Saddle River, NJ: Pearson/Prentice Hall. 31 For more on venture ‘pitch’ presentations, see Barringer, B. R. (2009). Preparing effective business plans: An entrepreneurial approach. Upper Saddle River, NJ: Pearson/Prentice-Hall; and Sherman, A. J. (2007). Start fast and start right. New York: Kaplan Publishing. 32 For excellent resources on business plan preparation and presentations, see Garage Technology Ventures, http:// www.garage.com/resources.

ENTREPRENEURIAL CASE ANALYSIS

PART 4

ON SHAKY GROUND: JUST ORGANIC LIMITED’S JOURNEY THROUGH NATURAL DISASTERS Jodyanne Kirkwood & Sara Walton, University of Otago An ecopreneur is a relatively new term to define those entrepreneurs who start new businesses based on the principle of sustainability. In practice this means they have a green product or service, and they also run the business in a green way (known as a ‘green-green’ ecopreneur).1 This case study is the story of a New Zealand ecopreneur – Julian McKeefry from Just Organic Limited. But even an ecopreneur so concerned about the earth could not have foreseen what was about to happen. Founded in 2007 in Christchurch, New Zealand, Just Organic Limited is an organic box delivery service that embodies the triple-bottom-line principles of people, profit and planet (three P’s, see page 588. Also see ‘Triple bottom line performance measures’, page 574.). Like old-time milk delivery in glass bottles, the business supplies households with fresh and seasonal certified organic fruit and vegetables – and picks up the waste. Julian is the face and inspiration of the company, and has a background in horticulture, farming and teaching. Coming from this background he felt that his skills could be applied to organic produce box delivery service as he had been involved in a similar service in the United Kingdom. After moving to New Zealand from Australia, Julian and his business partner set out to invest their own funds in a business that would offer them convenience and freedom. Immediately the pair were attracted to organics, as it aligned with their personal values. They felt that their complementary skills in administration, international business, operations

Entrepreneurial case analysis

and the technical side of conducting business could be well applied to the organic produce box delivery idea. Accordingly, they purchased a customer database and started Just Organic Limited by recruiting suppliers and handling and packing the produce in their own warehouse. After a few years, the partner left the business and it is now run solely by Julian, with the help of administrative employees and some outsourcing (i.e. couriers, some of the packing).

Pre-earthquake activities Julian set out to own a business that would offer a close alignment with his personal values. Aware of the toxins and chemicals frequently found in our food chain, and an inability to conveniently obtain fresh organic produce for his family, Julian believed that he could fill the gap that existed in the market. Julian felt that he could use both the business and his personal knowledge to educate, encourage change, preserve the environment and soil, and increase the health of New Zealanders through informing them about the benefits of eating organic food. This meant he had to find balance between creating a profitable business operation and staying true to his environmental values. Julian believed it was possible to do both: We are a business and we want to run as environmentally friendly as we can. So we have looked at ways that we could do this with our vehicles – biodiesel. We were conscious about every decision we made.

Chapter 16: Developing a sustainable business plan 623

In terms of environmental decisions within the company all packaging is recycled, cardboard delivery boxes are reused and waste is kept to a minimum. Julian believes so strongly in what he is doing that he also collects materials from customers for recycling when he delivers their order: We’re kind of like a recycling bin in some ways, we’re actually collecting rubbish that we normally wouldn’t but it’s attached to this business.

Julian was less focused on growing the business exponentially; instead he desired a ‘well run business that’s ethical, moral and friendly’, with the creation of trusting and strong relationships with his clients being of higher priority. In other words, people and planet were more important than profit. (See ‘Triple bottom line performance measures’ in Chapter 15, pp. XX.) New customers were developed through having ‘friends of the business’ who spread their positive opinions about Just Organic Limited. Julian faced the daily reality of justifying why organics is better for your health and for the environment than nonorganic produce. People typically apply bargain shopping mentality to food – great for finding a new pair of shoes – but is this a healthy approach to food? As such, he was reinforcing his belief system and developing an ability to constantly bounce back from the negative stereotyping: It’s not about being a hippie or whatever; it’s about making an effort because that little effort counts. One effort times a million people, it’s going to make a huge difference and that’s basically what we’re pushing for.

In the early years after starting the business, Julian focused on keeping the business local, manageable and remained true to his environmental principles in running the business. Then disaster struck.

The Christchurch earthquake and aftermath On 22 February 2011, the historic and elegant City of  Christchurch, New Zealand (Otautahi in Maori language), and the surrounding Canterbury region experienced a series of devastating earthquakes, the most significant with a magnitude 6.3. This earthquake shattered buildings, destroyed businesses and took the lives of 185 people. The immediate and immense financial implications were felt not only regionally, but also nationally with the estimated cost of damage predicted to exceed US$12.4 billion.2 Unfortunately for many businesses, the costs of reestablishing and continuing as usual became overwhelming, and many businesses either closed down or relocated.3

Entrepreneurial case analysis

In the aftermath of the earthquakes, Just Organic Limited continued operating and Julian attributes this to the strong structure of the company and the loyal customer base that comes with running such a niche and personalised business. However, while managing to survive, Julian faced a plethora of challenges, including his warehouse being destroyed, so he had to move operations to his private home. While the majority of stock was unharmed and able to be salvaged from the warehouse, ongoing delivery was impossible due to significant road damage, and Julian made the decision to donate over $2000 of his stock to his local community before it perished. Prior to the disaster up to a third of customers were residing close to his warehouse, but his customer base was virtually halved overnight as many were forced to move to other suburbs in Christchurch and throughout New Zealand due to significant infrastructure and housing damage. The earthquake caused Julian to rethink many of his ideas regarding expansion. He was in the process of setting up a smoothie shop for passing cyclists, an idea which has been put aside for the meantime. However, these setbacks did not weaken Julian’s resolve to continue with the business. He spotted opportunities in the chaos that ensued. The reality of his situation is acknowledged in a matter-of-fact manner, with excitement building when he discusses his plans for the future. His comment about his thoughts immediately after the earthquakes succinctly sums up his attitudinal approach: I never thought about packing up. I thought to myself immediately, this is good news. Because war and destruction often end up positive, so if the reward is as great as the journey, then it should be pretty good.

Just as it was before the earthquakes, Julian has the same orientation around his green ethos. He is still adhering to the findings of Pastakia of being a ‘change agent’.4 However, what is interesting is that whereas his pre-quake identity was firmly situated around his green ethos, post-quake, in order to survive and grow through the challenges, he had to focus more on his business acumen – with greater focus on profitability, margins and marketing issues. For instance: So as my business grows my margins are able to come down too, so at 500 customers I’d be selling probably about 90% of my produce at the same price as conventional because I could afford to do it, it’s online I don’t have to pay for a shop. So if I’ve cut out all those expenses on top of the margin, then I can actually bring the margin down.

624 Part 4: Growth strategies for entrepreneurial ventures

Organics still had that stigma attached to it, so I’m having to change my image as well, because I don’t want people to look at it like that. If I was to advertise that image it wouldn’t be doing me any good you know.

The earthquakes inevitably led him to re-evaluate priorities. Though Julian still remains environmentally conscious, he is realistic about the need to make money in order to have a sustainable business. For example, though using expensive couriers to supply to locations outside of Christchurch was a concern early on, serving the dispersion of customers around New Zealand made it necessary in order for the company to remain in business. Just Organic Limited now delivers all over New Zealand. Indeed, Julian believes the debate surrounding food miles (see ‘Food or product miles’ in Chapter 15) and carbon emissions has calmed over the recent years, and customers may be less concerned with this issue than he previously thought. Also, he abandoned his idea of opening a retail outlet to reach a wider range of customers, as this is presently difficult given the shortage of appropriate properties to lease as the city is still being rebuilt some four years later. Internal tensions have been evident in balancing the change in circumstances caused by the quake with the strong green ethos that Julian holds. Pre-quake, he deliberately limited business growth to enable a focus on educating consumers as to the benefits of organic systems over nonorganic. Post-quake this tension has been between promoting business growth in a new direction as a response to both customer dispersion and increasing demand, and the realisation that as an online business the entire world is a potential market. In order to remain in operation, Julian has had to sacrifice some of his ideas regarding his strong commitment to the environment. He has also had unexpectedly to have the business operate from his home for over three years and this has created some difficulty in balancing work and family. There is still a shortage of affordable commercial space in Christchurch as the rebuilding continues.

Julian’s environmental values remain strong and are largely evident throughout his entire business. However, he remains realistic and logical about his efforts. To be successful, in Julian’s view, would be ‘to change the soil on earth’. Using the PPP philosophy, Just Organic Limited is interested in creating a sustainable and profitable business, while simultaneously supporting others to build and maintain their own organic farming. Though they may lose business because of it, educating the public remains a high priority. In order to provide a steady income for his family, Julian also supplements his business with some teaching at a polytechnic. So the question for Julian now is – where to from here? Does he abandon some of his more ‘difficult’ goals to ensure the survival of the business?

Discussion questions 1 2

3

4

5

6

How did Julian see the gap in the market to develop the venture initially? How does Julian measure performance and success in Just Organic Limited? Is this different to other entrepreneurial ventures? If so, in what ways is this measurement of performance and success different? For the company to expand, additional capital would be required. Which source(s) of capital do you think would be most suitable for Just Organic Limited to pursue? What possible growth options do you see for Just Organic Limited? Remember that the growth options should be in line with the owners’ green ideals. What do you think you would have done if placed in a similar position to Julian when faced with several large-scale earthquakes? In this case, you can see how Julian has balanced his environmental ideals along with his entrepreneurial ideas. How easy or difficult do you think it is to have both in a business?

ENDNOTES 1 Issak, R. (2002). The making of the ecopreneur. Greener Management International, 38 (Summer), 81–91. 2 Stevenson, J. R., Kachali, H., Whitman, Z., Seville, E., Vargo, J. & Wilson, T. (2011). Preliminary observations of the impacts of the 22 February Christchurch earthquake on organisations and the

economy: A report from the field (22 February–22 March 2011). Bulletin of the New Zealand Society for Earthquake Engineering, 44(2), 1–12. 3 Bowden, S. (2011). Aftershock: Business relocation decisions in the wake of the February 2011 Christchurch

earthquake. Journal of Management and Organization, 17(6), 857–63. 4 Pastakia, A. (1998). Grassroots ecopreneurs: Change agents for a sustainable society. Journal of Organizational Change Management, 11(2), 157–73.

Acknowledgement: Thank you to Julian McKeefry for allowing us to research Just Organic over the past seven years. Just Organic website: http://justorganic.co.nz

Entrepreneurial case analysis

» BUSINESS PLAN REVIVING SAMOA’S COCOA INDUSTRY COCOA SAMOA LTD BUSINESS PLAN Every business plan has a context. This business plan was submitted to the European Union’s to CourseMate Express International Agriculture and Trade program. It was turned down due to ‘funding priorities’ Go to view more business (most of the money went to Fiji). While it lacks a few elements such as a ‘harvest strategy’, we plans include it because almost everyone can relate to chocolate, and it is an example of an entrepreneurial plan emphasizing sustainable development. IACT invited Pacific-based enterprises, farmer/grower/processor/exporter associations and NGOs to apply for technical assistance to support the strengthening of export capacity in primary industries (for example, agriculture, livestock and aquaculture). IACT sought projects that could develop environmentally-friendly production systems (for example, organic agriculture, low carbon footprint and eco-certification) that could assist global exporters to adapt to the impacts of climate change in export operations. This plan closely follows many of the elements of the template in Chapter 16 and presents an easy-to-follow, sustainable business planning process. Previous editions of this book have included business plans which are available online. The first edition included ‘Wai-Fi Ltd: A Maori-owned Wireless Internet Service Provider for water-adjacent [wai means water in Maori/te reo] communities in Auckland, New Zealand’. The second and third editions included ‘Red River Optical: Affordable reading glasses for Vietnam’, an Australian company creating opti-preneurs in Vietnam. The business plan in this edition made extensive use of Business Plan Pro and Sales and Marketing Pro software from Palo Alto Software (http://www.paloalto.com). As a bonus, we also are providing online the latest business plan from the American edition of the book, entitled ‘Hydraulic Wind Power, LLC: a renewable energy company with a patent-pending technology to produce wind energy’.

EXECUTIVE SUMMARY Cocoa Samoa Ltd (‘CSL’) is a Samoan registered company that utilises climate-smart and sustainable practices to rescue the Samoan cocoa industry, exploit the looming shortage of cocoa globally, and produce cocoa and chocolate products for Pacific Rim markets. CSL has formed a consortium of cocoa industry stakeholders including: cocoa growers; cocoa bean roasters; end-users (customers); chocolate makers; branding, marketing and sales forces; bio-energy and civil engineering; project management staff; sustainable landscape managers; as well as strategic planners. CSL uses ‘sustainable entrepreneurship’1 to recapture Samoan national food security in a renowned industry trying to come back from natural and economic disasters. Our initiative will significantly increase export earnings for Samoa and create downstream socio-economic returns, including an increase in Samoan GST revenues. Our aim is to create a new brand of Samoan cocoa and chocolate brand for markets in Australia-New Zealand and the Pacific Coast of the United States of America (USA), and eventually in Northern Germany.

OBJECTIVES The objectives of this Business Plan are to: • attract start-up funding of $1 297 000 • to exploit the looming shortage of cocoa and chocolate by reviving and rescuing Samoa’s high-quality cocoa industry

Appendix

626 Appendix

• establish alliances and signed agreements with strategic partners and stakeholders as members of the value chain, and shorten the link between growers and consumers • carry out cocoa extension training programs to rehabilitate existing Samoan plantations, and work to plant new stock • achieve a visible market penetration in Australia and New Zealand and a foothold in the USA market, and • achieve Samoan cocoa and chocolate brand awareness in our target markets.

VALUES AND MISSION • CSL’s values are rooted in protecting and empowering the Samoan cocoa grower community, who are susceptible to impacts of natural disasters, price fluctuations, global economic crises and climate change. • Our vision is to pay Samoan communities a fair price to produce and export high-value products while adhering to sustainable, organic and fair-trade principles. • CSL revives Samoa’s century-old cocoa industry to take advantage of the growing shortage of cocoa products globally.

HOW WE MEASURE OUR SUCCESS We know we will have succeeded if the following keys to success are achieved: • Construct a pilot cocoa processing and chocolate factory • Set up a cloud-based cocoa lab connecting growers with buyers in Australia, New Zealand and the USA • Pay fair farm-gate prices to the grower • Increase the production and quality of Samoan cocoa • Establish a recognised brand. FIGURE A1.1 ESTIMATED SALES, GROSS MARGIN AND NET PROFIT

$4 000 000 $3 600 000 $3 200 000 $2 800 000 $2 400 000 $2 000 000 $1 600 000 $1 200 000 $800 000 $400 000 $0 2016

2017 Sales

Gross Margin

2018 Net Profit

Business plan 627

START-UP SUMMARY Start-up expenses These are the start-up expenses required before January 2016. All expenses. 1 USD ¼ 2.27 SAT // 1 SAT ¼ 0.42 USD. • Start-up salary expenses are $45 000 for HF, $45 000 for SB, $25 000 for TL. • Based upon previous experience and World Bank estimates, we are estimating about $15 000 in legal and administrative fees to register the company and arrange the proper compliances to build the factory in Samoa. • Stationery, insurance, office space, secretarial assistance and other unforeseen are standard figures. • Special commissions refers to administrative fees to achieve compliance. • Travel and accommodation is because a key employee is living in Melbourne. • Trade shows refers to our intention to exhibit at the Fine Food New Zealand and Fine Food Australia shows. TABLE A1.1

START-UP

Start-up Requirements Start-up expenses Salaries

$ 115 000

Legal

$

15 000

Stationery

$

1 000

Insurance

$

1 000

Office space

$

3 000

Other unforeseen

$

5 000

Secretarial assistance

$

5 000

Special commissions

$

20 000

Travel and accommodation

$

12 000

Trade shows and promotion

$

30 000

Other

$

20 000

Total start-up expenses

$ 227 000

Start-up assets Cash required

$ 150 000

Start-up inventory

$

50 000

Other current assets

$

20 000

Long-term assets

$ 850 000

Total assets

$1 070 000

Total requirements

$1 297 000

628 Appendix

FIGURE A1.2 START-UP

$1 600 000 $1 400 000 $1 200 000 $1 000 000 $800 000 $600 000 $400 000 $200 000 $0 Expenses

Assets

Investment

Loans

INVESTMENT OFFERING Business description Samoa is a small, lower middle-income country with relatively good human development indicators. Total GDP was US$995 million in FY2014 while GDP per capita stood at US$5200. With a population of about 196 000, Samoa numbers 106 out of 187 countries in human development. One of the better performing economies in the Pacific before the 2009 tsunami, Samoa’s GDP growth was averaging 2.0 per cent in 2014, but that considerably up from 1.1 per cent in 2013.2 The service economy has grown strongly of late to 59% of the economy while agriculture has dropped from 65 per cent to 11 per cent of the labour force. Criollo and Trinitario cocoa varieties were originally planted in Samoa by German colonists before World War I. These highly praised varieties make Samoa a ‘Chocolate Treasure Island’, or some call it the ‘Ecuador of the Pacific’. Samoan cocoa beans are of high quality, and are organic with a low carbon footprint. But today, the industry needs to be ‘rescued’ from natural disaster, economic calamities and the effects of climate change. Revitalised cocoa production can make a substantial contribution to economic growth in Samoa. Both the cocoa stock and the required knowledge still exist in Samoa, but Samoan growers have lost touch with the global cocoa consumer, who desires artisan chocolate products that embody the values of health, environmental protection, climate change mitigation and community entrepreneurship. CSL aims to revive Samoa’s cocoa and chocolate and to recapture markets in Australia, New Zealand and the USA. This could not come at a more fortuitous moment as cocoa stocks are declining world-wide. There is increasing political instability in large cocoa growing areas in Africa. Global chocolate consumption is rising by 2–3 per cent pa. Cocoa producers elsewhere are tearing out cocoa and planting get-rich schemes such as oil palms. Markets for ‘craft chocolate’ are strong and growing in our target markets.

BUSINESS RATIONALE Samoa’s cocoa plantations are concentrated in the two ‘rain shadows’ (see the circled area of Figure A1.3) along the northwest coasts of both islands. Ninety per cent of Samoan cocoa is Trinitario and is classified by the International Cocoa Organisation (ICCO) as ‘fine and flavour’ (high standard).3

Business plan 629

Today, more than two-thirds of all Samoan land holdings have cocoa trees, with an estimated 2000 hectares of cocoa (including mixed cropping).4 FIGURE A1.3 MAP OF SAMOA

Apia

Source: ‘Samoa: shaded height and relief map’, published by Ginkgo Maps, http://www.ginkgomaps.com/en/rl3c_ws_samoa_map_illdtmcolgw30scut_ja_mres.jpg

What happened to Samoan cocoa? Despite decades of exports, the roller coaster began in the late 1970s. Exports declined due to poor planting material, falling commodity prices, declining quality and yields, coupled with unmanaged pest and disease. A recovery of sorts began in 1983 after a Cocoa Rehabilitation Program with re-plantings of a high-yielding, more disease-resistant but less flavourful variety (Amelonado). For the remainder of the decade, however, falling world prices led to a rapid decline in cocoa export values. Then came the devastating effects of back-to-back ‘century’ Cyclones Ofa and Val, and the drought that followed Cyclone Ofa, compounded by low world cocoa prices, all of which virtually destroyed the Samoan cocoa industry from 1990 to 2000. On top of that, a devastating tsunami in 2009 killed over 140 people and caused considerable economic losses. The final blow was Cyclone Evan in 2012 which caused extensive environmental damage which will take years to regenerate. Besides, Samoa was also hard hit by the food and fuel price shocks of 2008 and the global economic crisis. On the up side, Samoa’s competitors are also small and vulnerable, particularly Ecuador and Peru. Together with Venezuela and Mexico, these four countries produce 95 per cent of fine and flavourful cocoa. Fine or flavour beans are normally sold at a significant premium on the market due to increased market demand for gourmet chocolate. The fine cocoa market is increasing year after year, thanks to news reports of health-related benefits of cocoa. Cocoa products have become almost ubiquitous in the Western diet. Consumption of chocolate products in northern climates is significant and estimated at 5–10 kg per person per year, with some geographical variation linked to cultural norms and local climate. At about 10 kg per year (60 per cent of population drink 5 cups of Koko Samoa – about 200 g – per week, or 10 kg/year), Samoa is one of the highest consuming countries per capita in the world.5

630 Appendix

INDUSTRY ANALYSIS On the face of it, the outlook for the world’s chocolate industry is bright. Global chocolate consumption has also grown steadily since the 1990s and is predicted to hit 8.5 million tons in 2020. But numerous authorities are predicting a ‘looming chocolate crisis’ because demand will exceed supply. BloombergBusiness6 has predicted that by 2020 there could be 1m ton gap in cocoa production. Chocolate deficits, whereby farmers produce less cocoa than the world eats, are becoming the norm. Already, we are in the midst of what could be the longest streak of consecutive chocolate deficits in more than 50 years.7 International Cocoa Organization takes a positive beat; it believes that farmers can be incentivised to produce more of it, causing supply to rise.8 But the major problem is that climate change is affecting the growth of cocoa trees. An estimated 30 per cent is already lost to pests and disease,9 and the impacts of global warming are affecting the global cocoa stock. In Samoa, periods of drought and of excessive rain or wind have negatively impacted yield, and will continue to fluctuate as climate change intensifies. Many commentators see a ‘looming chocolate crisis’ where manufacturers cannot meet the demand of increasing consumption in the developing economies where per capita consumption is skyrocketing, for example, in India, Eastern Europe, Brazil and China (where per capita consumption is only one-tenth that of Switzerland).10 If proper training and remediation can be introduced, Samoan growers are well-positioned to take advantage of the global situation. Cocoa prices have climbed by more than 60 per cent since 2012, when people started eating more chocolate than the world could produce. The current world price of US$2750 per ton is expected to increase to over US$3500 by 2020.11 The ICCO Daily Price first closed above $3000 per metric ton in 2014. Cocoa futures prices have also increased dramatically. Samoa will always be a smaller player. The largest cocoa bean-producing countries in the world in 2013/14 (thousand metric tons) are as follows.12 TABLE A1.2

TOP COCOA PRODUCING COUNTRIES (THOUSANDS OF METRIC TONNES)

Ivory Coast

1550

Indonesia

410

Ghana

870

Nigeria

220

Cameroon

210

Brazil

200

Peru

75

Dominican Republic

70

Papua New Guinea

40 Source: Adapted from ‘ICCO Quarterly Bulletin of Cocoa Statistics’, Vol. XLI, No. 2, Cocoa year 2014/15, International Cocoa Organization.

Business plan 631

TABLE A1.3

TOP COCOA CONSUMING COUNTRIES (PER CAPITA KG PER ANNUM)

Switzerland

9

Germany

7.9

Austria

7.8

United Kingdom

7.5

Ireland

7.5

Norway

6.6

Sweden

5.4

Finland

5.3

Russia

5.3

Belgium

5.2

Australia

4.9

Netherlands

4.7

New Zealand

4.5

United States

4.3

France

4.2

Denmark

4.2 Source: Adapted from finder.com.au, Euromoniter International.

GOALS AND POTENTIAL Our business model is based upon the following three fundamentals. • Spanning the value chain: Samoan growers can reclaim a portion of the end-market value by implementing a strategy based on geographical indication, trademark protection, profitsharing and tapping new niche markets. • Rescuing the industry: CSL offers Samoan growers the training and knowledge they need to re-attain an economically viable cocoa industry. We can achieve market penetration to developed countries with sustainable, organic, fair trade, and ‘low-carbon’ cocoa and chocolate products. • Creating economic incentives: We give numerous incentives for cocoa growers to participate in this ‘chocolate entrepreneurship’, including: Unit Trust of Samoa (UTOS) shares to reward productive growers; cooperative trust funds; engaging with micro-financing institutions; providing school fees vouchers; introducing sustainable land management practices; offering chocolate-making training and facilities; and introducing climate change adaptation strategies.

UNIQUENESS OF PRODUCT • Cocoa paste is produced from beans pounded with a wooden mortar and pestle in the traditional way. • Cocoa liquor contains both cocoa solids and cocoa butter and is packed in 25 kg cardboard cartons with high density polyethylene square bottom bag.

632 Appendix

FIGURE A1.4 CSL PRODUCTS SAMOAN GOLD BEANS, FAIR TRADE, ORGANIC AND CARBON-NEUTRAL

Cocoa pods after harvest mature their colour towards yellow or orange.

Samoan cocoa beans after fermentation, drying and roasting, ready for manufacture.

Beans are cracked and de-shelled resulting in pieces of beans called cocoa nibs.

Cocoa butter used to make chocolate, personal care products and pharmaceuticals.

Bags of cocoa beans reading for export to chocolatiers.

Chocolate liquor is pure cocoa mass in liquid form solid at room temperature.

Samoan kava chocolate bars. Kava relaxes without disrupting mental clarity.

Bags of organic, fair-trade, carbon neutral chocolate for sale in health food store. Source: Author’s own images

Business plan 633

• Cocoa butter is a pale-yellow, pure edible vegetable fat used to make chocolate, but its real value is for cosmetics, pharmaceuticals, ointments and toiletries. • Cocoa powder is the low-fat component that comes out of cocoa during cocoa butter manufacture. • Cocoa nibs are roasted and crushed cocoa beans. • Samoan Gold Single-Origin Bars refer to a cocoa variety from a single geographical origin (single farm). • Samoan truffles: made with a chocolate ganache centre coated in chocolate or cocoa powder, usually in a spherical shape. • Factory Cellar Door Sales: Like a winery, the CSL Factory will have a cellar door where tourists can approach to taste and purchase.

STATEMENT ON SUSTAINABILITY For the cocoa and chocolate industries, the sustainability challenge is becoming broader, more complex and increasingly pressing due to the advent of increased climate change effects and its market distortions. Here are our sustainability principles: • Origins are important and traceability of supply is a growing concern to customers. Ours is 100 per cent pure, single-origin, fine-flavoured cocoa. Each bar is identified with its GPS coordinates. • We are concerned about the sustainability of our growers. The average grower’s age is 45–50 years old. Our training efforts recruit young Samoans. • The looming chocolate deficit has been linked to extreme weather events (heavier rains, longer droughts and higher insect infestations), so our production strategy needs to take climate change into account especially about climate change and its future occurrence in the Pacific.13 Our sustainability performance measures include: All products list GPS origins and farmer’s names. We are able to attract a corps of younger cocoa growers. Our growers are educated about climate change effects and adapt in measure (such as drip irrigation).

MARKETING Samoa’s chocolate history is more than one hundred years old. The market evaporated due to cyclones, drought, tsunami and drop in cocoa bean prices. Still, it maintains a beautiful crop of Trinitario cocoa with market potential. Our effort will revive Samoa’s cocoa legacy, build upon the existing knowledge of the grower, and take Samoan cocoa into the new age of gourmet- and healthoriented markets in New Zealand, Australia, USA and elsewhere. Samoa’s main problem is establishing a prestigious brand of cocoa in the same view as Ecuador and Peru. The main strategies emphasise fair trade, organic and sustainability.

MARKETING VISION Cocoa Samoa is built around the belief that we can assist Samoa’s cocoa industry recover from the devastating effects of natural disasters and economic calamities through sustainable entrepreneurship benefitting growers and the Samoan community. CSL believes that the modern ‘choco-sumer’ desires not just the finest and most flavourful cocoa and chocolate but also to make a contribution to sustainability (fair trade and natural organic ingredients) of an authentic culture in the South Pacific.

634 Appendix

MARKET RESEARCH AND ANALYSIS Our ideal customer is concerned about sustainability and indigenous culture, seeks the health benefits of cocoa and chocolate, and is willing to pay an up-price in exchange for the story of Samoa’s cocoa resurrection.

Target market identified Our two target markets comprise: (1) end consumers (buyers of finished and semi-finished products) and (2) trade customers (professional chocolatiers and buyers of ingredients). TABLE A1.4

MARKET ANALYSIS

MARKET ANALYSIS

2016

Potential customers

2017

2018

2019

2020

Growth

CAGR

LOHAS Lifestyles of Health and Sustainability

4%

400 000

416 000

432 640

449 946

467 944

4.00%

Trade customers

3%

100 000

103 000

106 090

109 273

112 551

3.00%

Discerning connoisseurs

3%

200 000

206 000

212 180

218 545

225 101

3.00%

Personal gift buyer

2%

100 000

102 000

104 040

106 121

108 243

2.00%

Corporate gift buyer

2%

100 000

102 000

104 040

106 121

108 243

2.00%

Overseas gift buyer

2%

100 000

102 000

104 040

106 121

108 243

2.00%

3.11%

1 000 000

1 031 000

1 063 030

1 096 127

1 130 325

3.11%

Total FIGURE A1.5 MARKET ANALYSIS (PIE)

LOHAS Lifestyles of Health and Sustainability

Trade customers

Discerning Connoisseurs

Personal Gift Buyer

Corporate Gift Buyer

Overseas Gift Buyer

End consumers (70 per cent of total customers) High-end, ‘gourmet’ and ‘health’ customers are trading up in quality and taste. We see this as a market opportunity since the lifestyle and gourmet categories are expected to grow as consumers

Business plan 635

incorporate cocoa products as functional foods into their diets. We can categorise our buyers in terms of their behavioural or buying patterns (psychographics) into the following categories: Discerning connoisseur (30 per cent of total customers) DCs are upper-income and married with children. Interests include wine appreciation, travelling and dining out. DCs are looking for the best tasting chocolates to enjoy personally or to serve to friends. They expect quality ingredients, exclusivity (small batch production), rare ingredients and a feeling of ‘craftsmanship’ (hand-made, artisanal). LOHAS consumer (30 per cent of total customers) LOHAS (Lifestyles of Health and Sustainability) customers in general like to consume goods and services focused on personal health, natural lifestyles, eco-tourism, alternative energy, green building and alternative transportation.14 They comprise 4 million Australians (25 per cent of the adult population)15 and spend $15þ billion pa on products that are friendlier to the environment, indigenous peoples and personal health. Purchasing of organic products is a permanent change in buyer decision. Personal gift buyer (15 per cent of total end consumers) These customers usually have a low-to-medium level of sophistication. For them, product appearance and packaging is as important as quality of chocolate since they want to make a (first) impression. Corporate gift buyer (10 per cent of total end consumers) With a medium level of sophistication, corporate gift buyers often have a preference for pre-packaged selections and find customised designs with their own logos very attractive. They have a strong bias towards Internet sales, but also are attracted by the personal approach through trade and business associations. They are prepared to pay mid-range prices. Overseas gift buyer (10 per cent of total end consumers) These customers have a medium-to-low level of sophistication and are looking for premium South Pacific products as gifts or souvenirs. Their preference is for pre-packaged selections that travel well.

Key selling factors to target segments We have identified the relative importance of key selling factors to each target market as seen in Table A1.5. TABLE A1.5

KEY SELLING FACTORS TO TARGET MARKET SEGMENTS

SELLING FACTOR/ TARGET GROUP

SENSITIVITY TO PRICE

SOPHISTICATION OF TASTE

SENSITIVITY TO PACKAGING

DESIRE FOR KNOWLEDGEABLE RETAILER

INTEREST IN CULTURE AND DEVELOPMENT

Discerning connoisseur

Low

High

Medium-High

High

High

LOHAS buyer

Low

Medium

Low

High

High

Personal gift buyer

Medium

Low-to-medium

High

Low

Medium

Corporate gift buyer

High

Low

High

Low

High

Overseas gift buyer

Medium

Medium

High

Low

High

636 Appendix

Trade industry The second major market for Samoan cocoa and chocolate is ‘the trade’. These are professional chocolatiers and trade buyers who supply the industry. Our focus is on Australia/New Zealand and the Pacific coast of the USA. In Melbourne for example, artisan chocolate consumption is increasing about 14 per cent per year.16 Koko Black and Ma´mor Chocolates are typical of the 35 boutique chocolate companies. Chocolatiers are serviced through large warehouses but also make independent purchases. Callebaut’s West African 53 per cent bittersweet chocolate sells for AUD18/kg, while 70 per cent dark blocks sell for AUD18. Per kilo prices of the single-origin products range from AUD23/kg for 70 per cent Ecuadorian to AUD40/kg for 66 per cent Madagascar, 70 per cent Sa˜o Tome´ and 60 per cent Grenadian. Here is a summary look at key potential ‘trade’ customers for Samoan cocoa blocks, beans and unrefined products: • Cadbury (Mondelez) operates three Australian factories as well as one in New Zealand; two in Melbourne, one in Tasmania and one in Dunedin, New Zealand. • Mars has its major production plant in Ballarat, Victoria. • Nestle´ Oceania has 15 factories in Australia, New Zealand and Papua New Guinea. • Ernest Hillier Chocolates’ production plant is in Melbourne and its product range includes over 600 chocolate products. • Australia’s Haigh’s Chocolates has its plant in South Australia. • J.H. Whittaker & Sons is a confectionery manufacturer specialising in chocolate and based in Porirua, New Zealand. • Dozens of independent, artisan chocolatiers throughout the countries.

MARKET SIZE AND TRENDS KPMG’s ‘A taste of the future: The trends that could transform the chocolate industry’ reported in 2014: • Global chocolate industry revenues to reach record US$117 billion in 2014. • Most dramatic change in consumer taste is surge in popularity of dark chocolate. Perceived health benefits have fuelled a 93 per cent growth in launches and dark chocolate now accounts for 20 per cent of US market. • Confectionery companies, governments and NGOs invest heavily in cocoa farmer development programs. Over US$800 million is set to be invested in the coming years to improve farmer productivity. This could have a significant impact on the farming community and on company sourcing costs. • Sustainability remains a key challenge. Companies are recognising the need to go beyond single initiatives with a strategic approach to improve yields and consumer trust.17 • Digital technology could revolutionise the supply chain as 3D printing is a disruptive innovation that could change the behaviour of companies and consumers. • Compound annual growth of 4.7 per cent in premium chocolate is driving the Australian market. Annual revenues have topped US$5.6 billion. • Australia has its first single-origin chocolate producer, Daintree Estates, which grows expensive beans, rich in polyphenols and antioxidants, for its high-end brand. All the farmers in this venture are shareholders.18

Business plan 637

COMPETITOR ANALYSIS Rather than calling them competitors, we would like to emulate these companies, as they are doing something that we should do. These include: • Divine Chocolate. Divine Chocolate Limited is a partnership between cocoa growers’ collectives in Africa and the alternative trading organisation Twin Trading. Farmers own the majority stake in the company and share its profits. Divine Chocolate is available in many natural foods stores, food co-ops and gift shops in Australia and New Zealand. • Grenada Chocolate Company and the Diamond Chocolate Factory in Grenada. Grenada grows almost entirely Trinitario cocoa. • Madecasse. Born of the American Peace Corps, Madecasse uses cocoa, vanilla and peppercorns found exclusively in Madagascar.

REMARKABLE DIFFERENCE Robert Louis Stevenson wrote Treasure Island while he was in Samoa. That’s why we call Samoa the ‘Chocolate Treasure Island of the Pacific’. We could also say that Samoa is the ‘Ecuador of the Pacific’, as both are small countries with significant stands of Trinitario (best variety) cocoa.

MARKETING PLAN Marketing strategy CSL must create a brand – Samoa Gold – to its mission, philosophy and values and clearly demonstrate its distinguishing characteristics of the company and the products. Themes • Pride: We are proud to produce a carbon-neutral, fair trade, organic, 100 per cent Trinitario chocolate for high-end consumers in the developed Pacific-Rim economies from low-cost, renewable bio-energy sources, from authentic cocoa plantations more than 120 years old. • Taste of Paradise: Samoan chocolate will fulfil the desires and lifestyle needs of people around the world – all eager for their ‘taste of paradise’. • Sustainable packaging: We use packaging made with starch, cellulose and polylactic acid (PLA), as opposed to the traditional petroleum polymer, because of consumer concern over packaging waste causing environmental damage. • Health conscious: Why would a person put something into their mouth that does not give health benefits? Our message: ‘You are holding in your hand the purest, most sustainable chocolates we can make. No additives, no preservatives. Only Freetrade, Organic Chocolate from Samoa.’ • The Chocolate Experience: We want to satisfy the experiential needs of our customers. We want to deliver a great chocolate experience that meets consumer desires. Words like ‘finish’, ‘snap’ and ‘sheen’ are used to describe the differences between chocolates, and tasters may discern berry, vanilla or coconut ‘notes’ in Samoa’s cocoa. Marketing objectives • Increase Samoa’s export sales volume. • Establish visible market share in the Australian organic and fair-trading category. Communication objectives • Increase brand awareness. • Increase brand recognition and brand recall.

638 Appendix

Targeting Segments selected: • aged 20–54, males and females • chocolate lovers • health conscious • organic food consumers • higher disposable income. CSL’s primary target audience are the organic food lovers and who are concerned with their health. Our targeted market sustain a higher disposable income, aged between 20–54, where we are focusing on both males and females. Our selected market desire a delicious treat and snack that remains tasty and healthy. This mature target market know what they want from their favourite chocolate and are not predominantly focused on the price of the product. These chocolate lovers differ themselves from the occasional chocolate consumer, whom consume products such as Cadbury and Mars. Our audience have a sophisticated palate and prefer the healthier option.

Branding elements FIGURE A1.6 SAMPLE SAMOAN COCOA BRANDS

Price rationale We are considering a dual price strategy: • Undercut the competition. For the trade market of professional chocolatiers, our intention is to place products 10–15 per cent below existing equivalents (e.g. couverture $14/kg versus $16þ/kg) in order to get brand awareness and traction in the market. If our couverture is as good as Callebaut, we can raise the price later. • Use scarcity. For the direct-to-consumer market, one of the advantages we have is our product’s scarcity, or lack of availability. Couple that with an ‘object of desire’ approach and you can always keep the price high online. The message is that we don’t have enough product to satisfy the demand we have created. We want to emphasise the rarity of the product.

Marketing materials Our Marketing Kit is tailored to individual prospects. Customer testimonials have been collected. We include case studies of chocolatiers and customers who have embraced our products.

Business plan 639

Advertising and promotions Our advertising is targeted and measurable. Ad types and placement address customers’ concerns. Our advertising plan (available upon request) lists media outlets, a budget estimate, a timeline and a list of offers.

Web plan CSL’s websites and other social media are marketing and sales tools that serve business development, sales and shipment. Our Web plan is available upon request.

Sales strategy CSL bears in mind the relatively small total volume, extent of competitors and brand concentration, price competitive nature of the market, due diligence of contracts and the high levels of concentration of retail trade outlets. Under the Preferential tariff for Forum Islands, Australia and New Zealand charge 0.00 per cent tariff for cocoa and chocolate imports. However, the United States can charge over 10 per cent tariff for cocoa powder and blocks/bars. • Local appointed agents: Our intention is to operate through an appointed local agent or agents to assist with market data, legislative requirements, sales contacts and market development. • Stock maintenance: We must maintain six to eight weeks of stock. Retailers have been known to delete lines that are not reliably supplied. • Establishing partnerships: We need to establish partnerships and alliances with buyers. We can meet them at Fine Food New Zealand, Fine Food Australia, ISM (Cologne) and All Candy (Chicago). We are keen to find those buyers interested in sourcing new, innovative lines preferably on an exclusive basis. Samoa has its own Trade Commissioners in New Zealand, China and other countries. • PR campaigns: Will be important to encourage and stimulate consumer participation and interest. For example, we wish to use one of the ocean-cruising vakas (Polynesian canoes) to deliver product to Melbourne, Sydney, Brisbane, Auckland, Honolulu, Seattle, San Francisco and Los Angeles. Sales forecast CSL is utilising its contacts in the target markets to leverage contracts through direct sales methods, trade shows and on-site demonstrations. Online and social media campaigns will also be used to create product awareness. Sales agents are controlled by the Sales Director. Our sales forecast growth rate is 10 per cent pa due to expected high demand and because we are growing from a very small base. TABLE A1.6

SALES FORECAST

SALES FORECAST

2016

2017

2018

Sales Samoa Gold Pacific BioKoko beans

$ 395 807

$ 500 000

$ 600 000

Koko likor

$ 395 807

$ 450 000

$ 550 000

Cocoa butter

$ 395 807

$ 500 000

$ 600 000

Cocoa powder

$ 213 850

$ 600 000

$ 700 000

640 Appendix

SALES FORECAST (Continued )

TABLE A1.6

FIGURE A1.7 SALES YEARLY

SALES FORECAST

2016

Cocoa nibs

$ 115 066

$ 250 000

$ 300 000

Single-origin bars

$ 371 620

$ 500 000

$ 750 000

Samoan truffles

$

39 738

$ 200 000

$ 250 000

Medicinal chocolates

$

28 993

$ 200 000

$ 300 000

Koko Samoa

$

74 329

$ 120 000

$ 130 000

Total sales

$2 031 017

$3 320 000

$4 180 000

DIRECT COST OF SALES

2016

Labour

$ 293 400

$ 302 960

$ 313 196

Energy costs

$

36 000

$

45 000

$

55 000

Inventory

$

70 000

$

77 000

$

84 000

Transport

$

16 000

$

17 600

$

19 360

Marketing web

$

20 000

$

22 000

$

24 200

Research

$

24 000

$

26 400

$

29 040

Training

$

36 000

$

39 600

$

43 560

Travel

$

16 000

$

17 600

$

19 360

Direct cost of sales

$ 511 400

$4 000 000

2017

2018

2017

2018

$ 548 160

$ 587 716

Samoa Gold Pacific BioKoko beans

$3 600 000

Koko likor

$3 200 000 Cocoa butter $2 800 000 Cocoa powder $2 400 000 Cocoa nibs

$2 000 000 $1 600 000

Single-origin bars

$1 200 000

Samoan truffles

$800 000

Medicinal chocolates

$400 000

Koko Samoa

$0 2016

2017

2018

Business plan 641

RESEARCH, DESIGN AND DEVELOPMENT One of the biggest problems in Samoa is the unevenness of cocoa fermentation (which kills the embryo and starts the chocolate chemistry). Putting together a container of cocoa beans for export means working with dozens of growers who have different styles and practices of fermenting beans. We intend to use the cloud-based software Cropster (see Figure A1.8), a bean-to-bar tracking system to help farmers taste chocolate made from their beans and adjust their processes to ensure their harvest meets buyers’ needs. Our business puts the growers in direct communication with the trade customers through the cloud-based Cropster Cocoa Lab, which brings together all the key processes on one web-based platform. This system allows: • real-time communication between chocolatier and grower • tracing of a sample back to its origin • cut test and tasting your samples • monitoring of fermentation, moisture, defects, flavours, aromas • evaluation results of cocoa samples shared with external partners like buyers • monitoring of volumes available and their qualities • evaluating growers and trace any outcome to the processes at the origin to improve quality over time. FIGURE A1.8 CROPSTER TECHNOLOGY

Cropster cloud-based software uses Bluetooth, wi-fi and Internet to connect growers with manufacturers in real-time monitoring of quality.

OPERATIONS PRODUCTION PROCESS The hillside is a 5-hectare-plus site near a good road. Beans arrive and are unloaded at the top for fermenting and solar drying. From the drying rack, they spill into the roasting operation using solar or low-quality fossil materials. This spills into the processing process. Finally the end-finishing container has few machines and needs air conditioning and dehumidification. We would need at least four ocean containers in the initial stages properly outfitted (see Figure A1.9), and then moving to eight containers (placed immediately to the right of the ones depicted). The participants have already developed these custom-built insulated containers into a food quality

642 Appendix

COCOA SAMOA LTD

FIGURE A1.9 FACTORY DESIGN

S COA CO

LTD OA AM

‘chocolate laboratory’ for product development and manufacture (depicted). The factory requires 230V, 3 phase, 35 amp wiring. We use an engineer, draughtsman and production team to create the solutions specifically designed to our needs.

Equipment Required equipment is as follows: winnower, roaster, melangeur, mixer, bean sorter, grinder, moulding station, tempering, fire-proofing and gas extraction system (see Figure A1.10 for some examples of equipment). These are manufactured in Florida, USA by Cacao Cucina of St Petersburg. FIGURE A1.10 CHOCOLATE MANUFACTURING EQUIPMENT FROM CACAO CUCINA

The refrigerated kitchen itself requires refrigerators, air conditioning and dehumidifier. Beyond this we require food service equipment (stainless steel and granite tables, microwave, dishwasher, blender, etc.), storage hardware (bins, utensil rack, shelves, food case), counter area equipment (counter tops, sinks etc.) and retail store equipment (cooled display cases, security, EFTPOS, ventilation, signage). Other miscellaneous equipment includes scales, shelves and lighting fixtures, flat trays for chocolate, storage containers, chocolate pots for ganache, storage racks for utensils, utensils (specialised chocolate knives, spatulas, etc.), miscellaneous and cleaning setup (bins, broom, buckets, aprons, towels, etc.).

Business plan 643

TRAINING CENTRE AND FACTORIES We commence with a Pilot Cocoa Processing and Chocolate Manufacturing and Training Centre (‘Training Centre’) producing 0.5–1.0/t of chocolate per week (see Figure A1.11). We then build a Liquor and Couverture Processing Plant on ’Upolu and Savai’i. It is envisaged that this should commence with 0.5–1.0/t production of cocoa liquor and chocolate per week (i.e. up to 50–250/t per year), which is only reliant on 10–25 per cent of hectares of Samoan cocoa production. TASK

7:00 AM

9:00 AM

11:00 AM

1:00 PM

3:00 PM

5:00 PM

7:00 PM

9:00 PM

CLEAN ROAST WINNOW GRIND REFINE REFINE TEMPER TEMPER OTHER

COCOA REMEDIATION PROGRAM CSL conducts cocoa-horticultural training and remediation programs to ensure an increase in the commercial quantities of cocoa beans required for cocoa liquor and couverture production for export.

CERTIFICATES AND ACCREDITATION There are numerous Standards, Accreditations and Certification programs that we could participate in. They are listed in order of our perceived importance: • International Cocoa Organization (ICCO): CSL will seek the support of the Government of Samoa to rejoin the International Cocoa Agreement, 2010, particularly Annex C – countries exporting ‘Fine or Flavour’ (FF) cocoa. • Organic certification: Working with Women in Business Development Incorporated (WIBDI), a non-governmental organisation that helps families in Samoa to establish sustainable enterprises, we will help women and families obtain organic certification. • Appellation: We shall establish an appellation for the ‘Samoa Gold Standard’, an objective system of classifying the top beans and growers. An appellation is a legally defined and protected geographical indication used to identify where the grapes for a wine were grown. The ‘Standard’ concept can also be employed in other Samoan industries. • Fairtrade Certification: Working with Fairtrade Australia-New Zealand we will help Samoan growers obtain better prices, decent working conditions, local sustainability and fair terms of trade for farmers and workers in the developing world. • ISO 14000: ISO 14000 refers to a family of voluntary standards and guidance documents to help organisations address environmental issues.

FIGURE A1.11 MULTI-MAN OPERATION – 450 KG/WEEK

644 Appendix

MANAGEMENT Our management team and all the employees are qualified in their fields with experience in cocoa processing and chocolate production and marketing operations. Part-time Australian and New Zealand national sales agents will be appointed. About 13 employees from CEO to factory workers will be on board by the beginning of Year One.

PERSONNEL PLAN Calculations Note: Salaries using real SAT salaries: Secretary $SAT12 000; Agronomists $SAT30– 35 000; Finance and Office Director $SAT20 000; Casual/labourer/field worker SAT30/day or AUD12/ day. Some positions begin only later in Y1 (e.g. April).

Key personnel • Our CEO is a motivated entrepreneur with interests in international business development, enterprise promotion and management. Experience in Australia, New Zealand and US Pacific Coast markets and certifications in Small Business Management and/or Company Directorship. • Development Director (DD) focuses on fund-raising, liaison with funders and donors, company promotion and building the website. Has project management and enterprise promotion experience, with experience in private sector development, government ministries and aid agencies, and civil society organisations. • Training and Community Director (TCD) organises farming communities, ensures on-time deliveries of production and carries out training. Also in charge of the Certification process. • Operations Director (OD) focuses on day-to-day production issues, maintains inventories and systems. Arranges work timetable for factory employees. • Technical support personnel operate equipment, vehicles, report to the OD. • Sales Director (SD) has experience as National Account Manager within Australia. A passionate individual with strengths as a business developer, he is the key account manager and a significant influence upon strategic promotion and marketing. • Admin Director (AD) will be in charge of the administrative functions. • Finance Director (FD) keeps everything on financial course and within cash constraints. Responsible for complying with Samoa labour laws. • Webmaster (part-time) with social media and e-commerce experience.

Board members/advisers We have on- and off-island Board members with experience in manufacturing, IT, communications, marketing, and food and beverage sectors.

LEGAL STRUCTURE Cocoa Samoa Ltd is a Samoan registered limited liability company formed by six individuals.

FINANCIAL PLAN We want to finance growth through a combination of grants/ODA, debt, cash flow and sweat equity of the founders. Purchase of the facility and equipment will require debt financing. Additional technology will be primarily financed with cash flow. In addition, we seek to achieve gross margins of 50 per cent and hold operating costs no more than 25 per cent of sales.

Business plan 645

TABLE A1.7

PERSONNEL PLAN

PERSONNEL PLAN

2016

2017

2018

CEO

$ 72 000

$ 72 000

$ 72 000

Development

$ 72 000

$ 72 000

$ 72 000

Training and Community

$ 36 000

$ 17 160

$ 18 876

Operations

$ 36 000

$ 17 160

$ 18 876

Technical

$ 24 000

$ 13 200

$ 14 520

Sales Director (on island)

$ 60 000

$ 56 000

$ 56 000

Administration/secretarial

$ 6 000

$ 6 600

$

Finance

$ 8 400

$ 9 240

$ 10 164

2 FT Factory and field hands

$ 24 000

$ 36 000

$ 48 000

4 FTE Casual workers

$ 42 000

$ 63 000

$ 75 000

Total people

13

16

18

Total payroll

$380 400

$362 360

$392 696

7 260

START-UP FUNDING CSL has major start-up expenses during Y1 and Y2 in building our capacity. We expect to be positive by the end of Y3. • Phase 1 commences with a Cocoa Processing and Chocolate Manufacturing and Training Centre (‘Training Centre’). • Phases 2–3 involve building Liquor and Couverture Processing Plant (‘the Plants’). The Start-up Funding table here lists all loans and investment (including grants/ODA) which we are seeking or have already obtained to fund the start-up costs of the business before the CSL starting date of January 2016. We also include here: • Long term loans (e.g. possible bank loan of $50 000). • Accounts payable are debts to be paid that we incur during start-up (e.g. 30 days to pay for a shipment of cocoa). • Other current liabilities are non-interest loans perhaps from the founders.

IMPORTANT ASSUMPTIONS The Financial Plan is based on important assumptions and is detailed in the following statements: • CSL forecasts that there would be no unforeseen changes in technology to make our products obsolete. • Cash flow is expected to be a problem, with most products needing to be paid for on delivery. • Grants are listed as investments, since, unlike a loan, they do not have to be repaid. • CSL assumes that even a slow-growth economy will not affect our Plan for the next five years due to the rising demand of cocoa products.

646 Appendix

TABLE A1.8

START-UP FUNDING

START-UP FUNDING

Start-up expenses to fund

$ 227 000

Start-up assets to fund

$ 1 070 000

Total funding required

$ 1 297 000

Assets Non-cash assets from start-up

$ 920 000

Cash requirements from start-up

$ 150 000

Additional cash raised

$ 375 000

Cash balance on starting date

$ 525 000

Total assets

$ 1 445 000

Liabilities and capital Liabilities Current borrowing

$

25 000

Long-term liabilities

$

50 000

Accounts payable (outstanding bills)

$

20 000

Other current liabilities (interest-free)

$

50 000

Total liabilities

$ 145 000

Capital Planned investment Owners

$

Grant/ODA

$ 1 477 000

Additional investment requirement

$

Total planned investment

$ 1 527 000

Loss at start-up (start-up expenses)

50 000

0

($227 000)

Total capital

$ 1 300 000

Total capital and liabilities

$ 1 445 000

Total funding

$ 1 672 000

• The source of raw material is more than enough to satisfy our needs, pending remediation efforts. • CSL assumes a medium-term holding (6–8 weeks) of inventory as stockpiling of product. • CSL assumes a 10 per cent annual increase in our selling price (however 20 per cent for single-origin bars), that is, a price above inflation as our product becomes more known and sought after.

Business plan 647

• CSL assumes a decrease in our material costs due to economies of scale as growers ramp up production. • Short-term interest rate based upon current ANZ and Westpac lending rates of 11–18 per cent. These costs could be slashed with foreign direct investment or private equity at 4 per cent.

PROFIT AND LOSS As the profit and loss table shows, CSL expects to continue its steady growth in profitability over the first three years of operations. TABLE A1.9

PROFIT AND LOSS

PRO FORMA PROFIT AND LOSS

2016

2017

2018

Sales

$2 031 017

$3 320 000

$4 180 000

Direct cost of sales

$ 511 400

$ 548 160

$ 587 716

Other costs of sales

$

$

$

Total cost of sales

$ 554 169

$ 595 160

$ 639 716

Gross margin

$1 476 848

$2 724 840

$3 540 284

72.71%

82.07%

84.70%

Payroll

$ 380 400

$ 362 360

$ 392 696

Marketing/Promotion

$

$

$

Depreciation

$ 120 000

$ 150 000

$ 175 000

Rent

$

6 000

$

6 000

$

6 000

Utilities

$

6 000

$

6 000

$

6 000

Insurance

$

6 000

$

6 000

$

6 000

Payroll taxes

$

57 060

$

54 354

$

58 904

Other

$

60 000

$

70 000

$

80 000

Total operating expenses

$ 677 460

$ 696 714

$ 766 600

Profit before interest and taxes

$ 799 388

$2 028 126

$2 773 684

EBITDA

$ 919 388

$2 178 126

$2 948 684

Interest expense

$

$

$

Taxes incurred

$ 211 769

$ 537 317

$ 733 433

Net profit

$ 572 560

$1 452 746

$1 982 987

28.19%

43.76%

47.44%

Gross margin %

42 769

47 000

52 000

Expenses

Net profit/sales

42 000

15 059

42 000

38 063

42 000

57 263

648 Appendix

$2 000 000

FIGURE A1.12 PROFIT YEARLY

$1 800 000 $1 600 000 $1 400 000 $1 200 000 $1 000 000 $800 000 $600 000 $400 000 $200 000 $0 2016

2017

2018

2016

2017

2018

$3 600 000

FIGURE A1.13 GROSS MARGIN YEARLY

$3 300 000 $3 000 000 $2 700 000 $2 400 000 $2 100 000 $1 800 000 $1 500 000 $1 200 000 $900 000 $600 000 $300 000 $0

CASH FLOW The Table presents our projected cash flow balances. The critical first year reflects negative cash flow. CSL intends to distribute dividends to its shareholders in a way that will enable the continuation of the expansion of the company according to this Business Plan. CSL estimates that no distributions will occur in Y1–Y2, and $50 000 will be distributed in Y3, and that from year four forward 50 per cent of the profit (after tax) will be distributed to the shareholders as Dividends. The Board of Directors will determine any other distributions (for example, to top leadership) to be made on an annual basis.

Business plan 649

TABLE A1.10

PRO FORMA CASH FLOW

PRO FORMA CASH FLOW

2016

2017

2018

Cash received Cash from operations Cash sales

$ 1 523 263

$ 2 490 000

$ 3 135 000

Cash from receivables

$ 332 634

$ 718 860

$ 970 848

Subtotal cash from operations

$ 1 855 896

$ 3 208 860

$ 4 105 848

Sales Tax, VAT, HST/GST received

$ 304 653

$ 498 000

$ 627 000

New current borrowing

$ 213 850

$ 213 850

$ 213 850

New other liabilities (interest-free)

$

21 379

$

10 000

$

10 000

New long-term liabilities

$ 100 000

$

0

$

0

Sales of other current assets

$

1 000

$

10 000

$

10 000

Sales of long-term assets

$

10 000

$

12 000

$

14 000

New investment received

$

54 547

$ 300 000

$ 400 000

Subtotal cash received

$ 2 561 325

$ 4 252 710

$ 5 380 698

Additional cash received

EXPENDITURES

2016

2017

2018

Expenditures from operations Cash spending

$ 380 400

$ 362 360

$ 392 696

Bill payments

$ 930 771

$ 1 395 846

$ 1 620 930

Subtotal spent on operations

$ 1 311 171

$ 1 758 206

$ 2 013 626

Sales Tax, VAT, HST/GST paid out

$ 304 653

$ 498 000

$ 627 000

Principal repayment of current borrowing

$

6 000

$

12 000

$

12 000

Other liabilities principal repayment

$

6 000

$

12 000

$

12 000

Long-term liabilities principal repayment

$

6 000

$

12 000

$

12 000

Purchase other current assets

$

6 000

$

12 000

$

12 000

Purchase long-term assets

$

6 000

$

12 000

$

12 000

Dividends

$

0

$

0

$

50 000

Subtotal cash spent

$ 1 645 824

$ 2 316 206

$ 2 750 626

Net cash flow

$ 915 501

$ 1 936 504

$ 2 630 072

Cash balance

$1 440 501

$3 377 005

$6 007 077

Additional cash spent

650 Appendix

FIGURE A1.14 CASH FLOW Y1

$1 400 000 $1 200 000 $1 000 000 $800 000 $600 000 $400 000 $200 000 $0 Jan

Feb

Mar

Apr

May

Jun

Net Cash Flow

Jul

Aug

Sep

Oct

Nov

Dec

Cash Balance

BREAK-EVEN ANALYSIS Our break-even analysis is based on running costs, namely the ‘burn-rate’ costs we incur to keep the business running short of revenue for more than a year. Our upfront costs for building the factories and recruiting competent staff mean that we’ll likely have ‘pain’ during our early period. Our assumptions on average unit sales and average per-unit costs are based upon a low-ball assumption. In this analysis, we changed the definition of ‘fixed costs’ slightly. According to financial textbooks, fixed costs would be those that you would pay even after you closed the business down (such as lease costs, interest and other costs you could not cancel). Our definition however is average running costs (including rent, payroll, telephones, utilities, etc.) instead of fixed costs. This produces a more practical break-even point. TABLE A1.11

BREAK-EVEN ANALYSIS

BREAK-EVEN ANALYSIS

Monthly revenue break-even

$ 75 454

Assumptions: Average per cent variable cost

25%

Estimated monthly fixed cost

$56 455

BALANCE SHEET CSL’s projected company balance sheet follows. Our projected balance sheet shows a growth in net worth $1 495 143 to more than $6m in 2016.

Business plan 651

$30 000

FIGURE A1.15 BREAK-EVEN ANALYSIS

$20 000 $10 000 $0 ($10, 000) ($20, 000) ($30, 000) ($40, 000) ($50, 000) $0

$10 000

TABLE A1.12

$20 000

$30 000

$40 000

$50 000

$60 000

$70 000

$80 000

$90 000 $100 000 $110 000

PRO-FORMA BALANCE SHEET 2016

2017

2018

Assets Current assets Cash

$ 1 440 501

$3 377 005

$6 007 077

Accounts receivable

$ 175 120

$ 286 260

$ 360 412

Inventory

$ 114 600

$ 158 648

$ 170 141

Other current assets

$

$

$

Total current assets

$ 1 755 221

$3 848 913

$6 566 630

Long-term assets

$ 846 000

$ 846 000

$ 844 000

Accumulated depreciation

$ 120 000

$ 270 000

$ 445 000

Total long-term assets

$ 726 000

$ 576 000

$ 399 000

Total assets

$ 2 481 221

$4 424 913

$6 965 630

25 000

27 000

29 000

Long-term assets

LIABILITIES AND CAPITAL

2016

2017

2018

Current liabilities Accounts payable

$ 111 886

$ 114 982

$ 134 861

Current borrowing

$ 232 850

$ 434 700

$ 636 550

Other current liabilities

$

$

$

Subtotal current liabilities

$ 410 115

65 379

63 379

$ 613 061

61 379

$ 832 790

652 Appendix

TABLE A1.12

PRO-FORMA BALANCE SHEET (Continued ) 2016

2017

2018

Long-term liabilities

$ 144 000

$ 132 000

$ 120 000

Total liabilities

$ 554 115

$ 745 061

$ 952 790

Paid-in capital

$ 1 581 547

$1 881 547

$2 281 547

($227 000)

$ 345 560

$1 748 306

Earnings

$ 572 560

$1 452 746

$1 982 987

Total capital

$ 1 927 107

$3 679 853

$6 012 840

Total liabilities and capital

$ 2 481 221

$4 424 913

$6 965 630

Net worth

$ 1 927 107

$3 679 853

$6 012 840

Retained earnings

BUSINESS RATIOS The ratios show a plan for growth in order to reach maximum production and profitability within three years. Return on investment increases each year as we bring the factory to maximum capacity and production. Return on sales and assets remain strong and cost of goods decreases based upon efficiency projections. TABLE A1.13

RATIO ANALYSIS

RATIO ANALYSIS

Sales growth

2016

2017

INDUSTRY PROFILE

2018

n.a.

63.46%

25.90%

-1.41%

Accounts receivable

7.06%

6.47%

5.17%

60.97%

Inventory

4.62%

3.59%

2.44%

25.17%

Other current assets

1.01%

0.61%

0.42%

6.04%

Total current assets

70.74%

86.98%

94.27%

92.18%

Long-term assets

29.26%

13.02%

5.73%

7.82%

100.00%

100.00%

100.00%

100.00%

16.53%

13.85%

11.96%

47.79%

5.80%

2.98%

1.72%

34.89%

Total liabilities

22.33%

16.84%

13.68%

82.68%

Net worth

77.67%

83.16%

86.32%

17.32%

100.00%

100.00%

100.00%

100.00%

72.71%

82.07%

84.70%

33.68%

Per cent of total assets

Total assets Current liabilities Long-term liabilities

Per cent of sales Sales Gross margin

Business plan 653

TABLE A1.13

RATIO ANALYSIS (Continued )

RATIO ANALYSIS

Selling, general & administrative expenses

2016

2017

INDUSTRY PROFILE

2018

44.52%

38.32%

37.26%

12.99%

2.07%

1.27%

1.00%

0.05%

39.36%

61.09%

66.36%

2.60%

Current

4.28

6.28

7.89

1.85

Quick

4.00

6.02

7.68

1.32

Total debt to total assets

22.33%

16.84%

13.68%

82.68%

Pre-tax return on net worth

40.70%

54.08%

45.18%

38.95%

Pre-tax return on assets

31.61%

44.97%

39.00%

6.75%

Net profit margin

28.19%

43.76%

47.44%

n.a

Return on equity

29.71%

39.48%

32.98%

n.a

2.90

2.90

2.90

n.a

54

101

113

n.a

Inventory turnover

3.70

4.01

3.58

n.a

Accounts payable turnover

9.14

12.17

12.17

n.a

28

30

28

n.a

0.82

0.75

0.60

n.a

Debt to net worth

0.29

0.20

0.16

n.a

Current liab. to liab.

0.74

0.82

0.87

n.a

$1,345,107

$3,235,853

$5,733,840

n.a

53.08

53.28

48.44

n.a

Assets to sales

1.22

1.33

1.67

n.a

Current debt/Total assets

17%

14%

12%

n.a

Acid test

3.57

5.55

7.25

n.a

Sales/Net worth

1.05

0.90

0.70

n.a

Dividend payout

0.00

0.00

0.03

n.a

Advertising expenses Profit before interest and taxes Main ratios

Additional ratios

Activity ratios Accounts receivable turnover Collection days

Payment days Total asset turnover Debt ratios

Liquidity ratios Net working capital Interest coverage Additional ratios

654 Appendix

CRITICAL RISKS TABLE A1.14

SWOT ANALYSIS POSITIVE

NEGATIVE

External

Opportunities Great stories to tell! We become a showcase for Samoa’s lowcarbon strategy. World is swinging around to the lifestyles of health and sustainability. Target markets are looking for products such as ours. We have opportunity with an innovative product. Health-conscious consumers with active lifestyles. Demonstration of bio-energy technologies.

Threats See attached special section on ‘Threats’.

Internal

Strengths Groups anxious to engage. Certifications exist. New and innovative products that tick all the boxes for advanced markets. Products for the huge LOHAS market. Experienced principals and board members. Reduced barriers to entry through familiarity with AU, NZ, US markets. Experience in online media. Control of value chain. Samoa medium to good in many indicators of doing business.

Weaknesses New to the market. Restricted advertising budget. Possible impediment or delays of order deliveries. Farmers losing their knowledge. Already have pests and diseases. Cyclones are frequent. Samoa performs poorly in getting credit, trading across borders, enforcing contracts and tax compliance.

THREATS We are especially concerned about the threats to Samoan Biosecurity. We seek to reduce the risk of importation of infectious diseases, quarantined pests and invasive species. • Fungal diseases are a principal constraint to cocoa production, and on a global scale the greatest losses result from black pod rots – caused by Phytophthora. • Cocoa pod borer is a moth whose larvae tunnel into cocoa pods to feed on the seeds for about two to three weeks. They chew their way out of the fruit to pupate. • Samoa is also subject to natural disasters, particularly cyclones. • Rodents are serious pests to Samoan cocoa. Rats like ripe pods, and this means that growers need to search for rats when pods are ripening.

HARVEST STRATEGY This business plan does not contain a harvest strategy.

MILESTONE SCHEDULE The following Table lists important project milestones during the pre-production start-up period through the end of Y1.

Business plan 655

TABLE A1.15

MILESTONES

MILESTONES

START DATE

END DATE

MANAGER

DEPARTMENT

Domain secured

15/03/2016

15/03/2016

$

100

CEO, MD

IT department

Business licence and FIC

15/03/2016

1/06/2016

$

1 000

AD

Finance/Accounts

Factory design

15/03/2016

1/06/2016

$ 10 000

CEO, ENGINEER

Legal

Web marketing

15/03/2016

1/06/2016

$

0

MD

Marketing

Building permit/EIA

15/03/2016

1/09/2016

$

1 000

TD

Team

Purchase contracts in place

15/03/2016

31/12/2017

$ 10 000

DD, TD

Team

Trade Secrets Established-NDAs

15/03/2016

1/10/2016

$

1 000

CEO, DD

Team

Trademarks registered

15/03/2016

31/12/2017

$

5 000

ABC

Team

Community and training

15/03/2016

31/12/2014

$150 000

TD

Team

Land lease for factory

1/06/2016

1/09/2016

$ 50 000

Legal office

Legal

Factory construction

1/06/2016

31/12/2017

$300 000

CEO, ENGINEER

Team

Office IT network

1/06/2016

1/09/2016

$

2 000

IT specialist

IT department

Temporary HQ set up

1/06/2016

1/09/2016

$

5 000

DD, TD

3 H/Q

Landscaping remediation

1/06/2016

14/10/2016

$

5 000

Landscapers

Team/Private

Customs/Biosecurity

1/06/2016

31/12/2017

$

3 000

TD

Team

Koko Shop running

1/09/2017

1/09/2017

$ 10 000

Coop

Team

Community and training

15/03/2016

31/12/2017

$150 000

TD

Team

Totals

BUDGET

$703 100

$10 000 $10 000 $10 000 $ 5 000 $ 5 000 $ 1 000 $ 1 000 $ 1 000 $53 000

Koko liquor

Cocoa butter

Cocoa powder

Cocoa nibs

Single-origin bars

Samoan truffles

Medicinal chocolates

Koko Samoa

Total Sales

$19 200 $ 3 000 $20 000 $ 5 000 $ 5 000 $ 1 000 $ 3 000 $ 2 000 $58 200

Labour

Energy costs

Inventory

Transport

Marketing Web

Research

Training

Travel

Subtotal Direct Cost of Sales

Direct Cost of Sales

$10 000

JAN

Samoa Gold Pacific BioKoko beans

Sales

SALES FORECAST

APPENDIX

0

$33 200

$ 1 000

$ 3 000

$ 1 000

$ 5 000

$ 1 000

$

$ 3 000

$19 200

$62 650

$ 1 300

$ 1 150

$ 1 200

$ 6 500

$ 5 500

$11 000

$12 000

$12 000

$12 000

FEB

0

$29 200

$ 1 000

$ 3 000

$ 1 000

$ 1 000

$ 1 000

$

$ 3 000

$19 200

$74 252

$ 1 690

$ 1 322

$ 1 440

$ 8 450

$ 6 050

$12 100

$14 400

$14 400

$14 400

MAR

$47 200

$ 2 000

$ 3 000

$ 1 000

$ 1 000

$ 1 000

$10 000

$ 3 000

$26 200

$88 235

$ 2 197

$ 1 520

$ 1 728

$10 985

$ 6 655

$13 310

$17 280

$17 280

$17 280

APR

0

$ 36 200

$ 1 000

$ 3 000

$ 1 000

$ 1 000

$ 1 000

$

$ 3 000

$ 26 200

$105 128

$ 2 856

$ 1 748

$ 2 074

$ 14 280

$ 7 321

$ 14 641

$ 20 736

$ 20 736

$ 20 736

MAY

0

$ 36 200

$ 1 000

$ 3 000

$ 1 000

$ 1 000

$ 1 000

$

$ 3 000

$ 26 200

$125 583

$ 3 713

$ 2 010

$ 2 489

$ 18 564

$ 8 053

$ 16 105

$ 24 883

$ 24 883

$ 24 883

JUN

$ 59 200

$ 2 000

$ 3 000

$ 3 000

$ 1 000

$ 1 000

$ 20 000

$ 3 000

$ 26 200

$150 413

$ 4 827

$ 2 312

$ 2 987

$ 24 133

$ 8 858

$ 17 716

$ 29 860

$ 29 860

$ 29 860

JUL

0

$ 38 200

$ 1 000

$ 3 000

$ 3 000

$ 1 000

$ 1 000

$

$ 3 000

$ 26 200

$180 619

$ 6 275

$ 2 659

$ 3 584

$ 31 373

$ 9 744

$ 19 488

$ 35 832

$ 35 832

$ 35 832

AUG

0

$ 38 200

$ 1 000

$ 3 000

$ 3 000

$ 1 000

$ 1 000

$

$ 3 000

$ 26 200

$217 451

$ 8 158

$ 3 058

$ 4 301

$ 40 785

$ 10 718

$ 21 437

$ 42 998

$ 42 998

$ 42 998

SEP

$ 59 200

$ 2 000

$ 3 000

$ 3 000

$ 1 000

$ 1 000

$ 20 000

$ 3 000

$ 26 200

$262 617

$ 10 605

$ 3 517

$ 5 310

$ 53 020

$ 11 790

$ 23 581

$ 51 598

$ 51 598

$ 51 598

OCT

0

$ 38 200

$ 1 000

$ 3 000

$ 3 000

$ 1 000

$ 1 000

$

$ 3 000

$ 26 200

$317 612

$ 13 786

$ 4 045

$ 6 193

$ 68 926

$ 12 969

$ 25 939

$ 61 918

$ 61 918

$ 61 918

NOV

0

$ 38 200

$ 1 000

$ 3 000

$ 3 000

$ 1 000

$ 1 000

$

$ 3 000

$ 26 200

$393 457

$ 17 922

$ 4 652

$ 7 432

$ 89 604

$ 22 408

$ 28 533

$ 74 302

$ 74 302

$ 74 302

DEC

656 Appendix

$ 6 000 $ 6 000 $ 3 000 $ 3 000 $ 2 000 $ 5 000 $ $ $ 2 000 $ 2 000

CEO

Development

Training and Community

Operations

Technical

Sales Director (on island)

Administration/secretarial

Finance

2 FT Factory and field hands

4 FTE Casual workers 6 $30 200

Total People

Total Payroll

700

500

JAN

PERSONNEL PLAN

700

500

$30 200

6

$ 2 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

FEB

700

500

$30 200

6

$ 2 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

MAR

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

APR

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

MAY

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

JUN

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

JUL

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

AUG

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

SEP

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

OCT

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

NOV

700

500

$32 200

13

$ 4 000

$ 2 000

$

$

$ 5 000

$ 2 000

$ 3 000

$ 3 000

$ 6 000

$ 6 000

DEC

Business plan 657

43.50%

$ 2 000 $ 60 200 ($ 7 200) 13.58%

Other Costs of Sales

Total Cost of Sales

Gross Margin

Gross Margin %

$ 53 230 ($25 980)

($19 360) 30.90%

$ 10 000 $ $ $ $ 4 530 $ 5 000 $ 53 230 ($60 430)

($50 430) $ ($16 438) ($44 443) 83.86%

Depreciation

Rent

Utilities

Insurance

Payroll Taxes 15%

Other

Total Operating Expenses

Profit Before Interest and Taxes

EBITDA

Interest Expense

Taxes Incurred

Net Profit

Net Profit/Sales

451

500

500

500

$ 2 000

Marketing/ Promotion

500

500

500

540

($ 7 161)

$

($15 980)

$ 5 000

$ 4 530

$

$

$

$ 10 000

$ 2 000

$ 30 200

$ 30 200

$ 35 400

$ 2 200

$ 33 200

Payroll

Expenses

$ 27 250

$ 58 200

Direct Cost of Sales

$ 62 650

$ 53 000

Sales

FEB

JAN

PRO FORMA PROFIT AND LOSS

500

500

500

639

598)

11.05%

($ 8 203)

($ 3 034)

$

($

($10 598)

$ 53 230

$ 5 000

$ 4 530

$

$

$

$ 10 000

$ 2 000

$ 30 200

57.42%

$ 42 632

$ 31 620

$ 2 420

$ 29 200

$ 74 252

MAR

500

500

500

747

14.81%

($13 070)

($ 4 834)

$

($ 7 157)

($17 157)

$ 55 530

$ 5 000

$ 4 830

$

$

$

$ 10 000

$ 2 000

$ 32 200

43.49%

$ 38 373

$ 49 862

$ 2 662

$ 47 200

$ 88 235

APR

2 928

2 000

5 000

4 830

500

500

500

$

$

$

6.67%

7 011

2 593

866

$ 20 470

$ 10 470

$ 55 530

$

$

$

$

$

$ 10 000

$

$ 32 200

62.78%

$ 66 000

$ 39 128

$

$ 36 200

$105 128

MAY

500

500

500

997

17.23%

$ 21 634

$ 8 002

$

$ 40 632

$ 30 632

$ 55 530

$ 5 000

$ 4 830

$

$

$

$ 10 000

$ 2 000

$ 32 200

68.61%

$ 86 162

$ 39 421

$ 3 221

$ 36 200

$125 583

JUN

500

500

500

13.51%

$ 20 326

$ 7 518

$ 1 296

$ 39 140

$ 29 140

$ 58 530

$ 5 000

$ 4 830

$

$

$

$ 10 000

$ 5 000

$ 32 200

58.29%

$ 87 670

$ 62 743

$ 3 543

$ 59 200

$150 413

JUL

3 897

5 000

5 000

4 830

500

500

500

1 443

31.75%

$ 57 341

$ 21 208

$

$ 89 992

$ 79 992

$ 58 530

$

$

$

$

$

$ 10 000

$

$ 32 200

76.69%

$138 522

$ 42 097

$

$ 38 200

$180 619

AUG

500

500

500

38.55%

$ 83 825

$ 31 004

$ 1 605

$126 434

$116 434

$ 58 530

$ 5 000

$ 4 830

$

$

$

$ 10 000

$ 5 000

$ 32 200

80.46%

$174 964

$ 42 487

$ 4 287

$ 38 200

$217 451

SEP

500

500

500

38.42%

$100 900

$ 37 319

$ 1 952

$150 171

$140 171

$ 58 530

$ 5 000

$ 4 830

$

$

$

$ 10 000

$ 5 000

$ 32 200

75.66%

$198 701

$ 63 916

$ 4 716

$ 59 200

$262 617

OCT

500

500

500

49.08%

$155 886

$ 57 656

$ 2 152

$225 694

$215 694

$ 58 530

$ 5 000

$ 4 830

$

$

$

$ 10 000

$ 5 000

$ 32 200

86.34%

$274 224

$ 43 388

$ 5 188

$ 38 200

$317 612

NOV

5 707

5 000

5 000

4 830

500

500

500

2 372

53.55%

$210 713

$ 77 935

$

$301 020

$291 020

$ 58 530

$

$

$

$

$

$ 10 000

$

$ 32 200

88.84%

$349 550

$ 43 907

$

$ 38 200

$393 457

DEC

658 Appendix

$ 39 750

Subtotal Cash from Operations

0 0

$

$

$

$

$

$ 60 700

New Other Liabilities (interest-free)

New Long-term Liabilities

Sales of Other Current Assets

Sales of Longterm Assets

New Investment Received

Subtotal Cash Received

2 000

0

1 000

$ 10 000

New Current Borrowing

7 950

$

Sales Tax, VAT, HST/GST Received 15.00%

Additional Cash Received

$

Cash from Receivables

0

$ 39 750

JAN

Cash Sales

Cash from Operations

Cash Received

PRO FORMA CASH FLOW

442

9 398

2 280

0

0

0

1 100

$ 71 207

$

$

$

$

$

$ 11 000

$

$ 47 429

$

$ 46 988

FEB

0

0

0

$ 96 066

$ 2 599

$

$

$

$ 1 210

$ 12 100

$ 11 138

$ 69 019

$ 13 330

$ 55 689

MAR

2 963

0

0

0

1 331

$112 775

$

$

$

$

$

$ 13 310

$ 13 235

$ 81 935

$ 15 759

$ 66 176

APR

0

0

0

$132 778

$ 3 378

$

$

$

$ 1 464

$ 14 641

$ 15 769

$ 97 526

$ 18 680

$ 78 846

MAY

3 851

0

0

0

1 610

$156 790

$

$

$

$

$

$ 16 105

$ 18 837

$116 387

$ 22 200

$ 94 187

JUN

0

0

$235 701

$ 4 390

$

$

$ 50 000

$ 1 771

$ 17 716

$ 22 562

$139 262

$ 26 452

$112 810

JUL

5 005

0

0

0

1 948

$220 601

$

$

$

$

$

$ 19 488

$ 27 093

$167 067

$ 31 603

$135 464

AUG

5 706

0

0

0

2 143

$262 847

$

$

$

$

$

$ 21 437

$ 32 618

$200 943

$ 37 855

$163 088

SEP

2 357

6 505

0

0

$ 364 260

$

$

$

$ 50 000

$

$ 23 581

$ 39 393

$ 242 425

$ 45 462

$ 196 963

OCT

7 416

0

0

0

2 593

$ 376 538

$

$

$

$

$

$ 25 939

$ 47 642

$ 292 948

$ 54 739

$ 238 209

NOV

66 113

8 454

10 000

1 000

0

2 852

28 533

59 018

$ 471 063

$

$

$

$

$

$

$

$ 361 205

$

$ 295 092

DEC

Business plan 659

$ 26 061

$ 56 261

Bill Payments

Subtotal Spent on Operations

0

0

$

$

$

$

$ 64 211 ($3 511)

$

$521 489

Other Liabilities Principal Repayment

Long-term Liabilities Principal Repayment

Purchase Other Current Assets

Purchase Longterm Assets

Dividends

Subtotal Cash Spent

Net Cash Flow

Cash Balance

0

0

0

$

0

$

Principal Repayment of Current Borrowing

0

0

0

0

0

0

9 398

$377 029

($144 460)

$215 666

$

$

$

$

$

$

$ 7 950

$206 269

$176 069

$ 30 200

FEB

Sales Tax, VAT, HST/GST Paid Out

Additional Cash Spent

$ 30 200

JAN

Cash Spending

Expenditures from Operations

Expenditures

PRO FORMA CASH FLOW

8 758

0

0

0

0

0

0

$422 999

$ 45 970

$ 50 096

$

$

$

$

$

$

$ 11 138

$ 38 958

$

$ 30 200

MAR

0

0

0

0

0

0

$474 769

$ 51 770

$ 61 005

$

$

$

$

$

$

$ 13 235

$ 47 770

$ 15 570

$ 32 200

APR

0

0

0

0

0

0

$473 032

($1 737)

$134 514

$

$

$

$

$

$

$ 15 769

$118 745

$ 86 545

$ 32 200

MAY

0

0

0

0

0

0

$548 227

$ 75 195

$ 81 595

$

$

$

$

$

$

$ 18 837

$ 62 758

$ 30 558

$ 32 200

JUN

0

1 000

1 000

1 000

1 000

1 000

$665 819

$117 592

$118 109

$

$

$

$

$

$

$ 22 562

$ 90 547

$ 58 347

$ 32 200

JUL

0

$669 041

$ 3 221

$217 379

$

$ 1 000

$ 1 000

$ 1 000

$ 1 000

$ 1 000

$ 27 093

$185 286

$153 086

$ 32 200

AUG

0

$818 400

$149 360

$113 487

$

$ 1 000

$ 1 000

$ 1 000

$ 1 000

$ 1 000

$ 32 618

$ 75 870

$ 43 670

$ 32 200

SEP

0

1 000

1 000

1 000

1 000

1 000

$1 035 579

$ 217 178

$ 147 082

$

$

$

$

$

$

$ 39 393

$ 102 689

$ 70 489

$ 32 200

OCT

0

1 000

1 000

1 000

1 000

1 000

$1 148 130

$ 112 552

$ 263 986

$

$

$

$

$

$

$ 47 642

$ 211 344

$ 179 144

$ 32 200

NOV

82 473

32 200

0

1 000

1 000

1 000

1 000

1 000

59 018

$1 440 501

$ 292 371

$ 178 692

$

$

$

$

$

$

$

$ 114 673

$

$

DEC

660 Appendix

$

$

$ 595 000

Inventory

Other Current Assets

Total Current Assets

20 000

$ 850 000

$ 1 445 000

Total Long-term Assets

Total Assets

$ 1 569 339

$ 840 000

10 000

$

0

$

Accumulated Depreciation

$ 729 339

$

$ 174 600

13 250

$ 850 000

20 000

50 000

$

$ 521 489

JAN

Long-term Assets $ 850 000

Long-term Assets

$

Accounts Receivable

0

$ 525 000

Starting Balances

Cash

Current Assets

Assets

PRO FORMA BALANCE SHEET

28 471

20 000

20 000

$ 1 396 900

$ 830 000

$

$ 850 000

$ 566 900

$

$ 141 400

$

$ 377 029

FEB

33 703

20 000

30 000

$ 1 408 903

$ 820 000

$

$ 850 000

$ 588 903

$

$ 112 200

$

$ 422 999

MAR

40 003

20 000

40 000

$ 1 486 372

$ 810 000

$

$ 850 000

$ 676 372

$

$ 141 600

$

$ 474 769

APR

47 605

20 000

50 000

$ 1 456 038

$ 800 000

$

$ 850 000

$ 656 038

$

$ 115 400

$

$ 473 032

MAY

56 802

20 000

60 000

$ 1 523 629

$ 790 000

$

$ 850 000

$ 733 629

$

$ 108 600

$

$ 548 227

JUN

67 952

21 000

70 000

$ 1 713 372

$ 781 000

$

$ 851 000

$ 932 372

$

$ 177 600

$

$ 665 819

JUL

81 505

22 000

80 000

$ 1 683 945

$ 772 000

$

$ 852 000

$ 911 945

$

$ 139 400

$

$ 669 041

AUG

98 012

23 000

90 000

$ 1 817 012

$ 763 000

$

$ 853 000

$ 1 054 012

$

$ 114 600

$

$ 818 400

SEP

24 000

$ 2 109 383

$ 754 000

$ 100 000

$ 854 000

$ 1 355 383

$

$ 177 600

$ 118 205

$ 1 035 579

OCT

25 000

$ 2 200 399

$ 745 000

$ 110 000

$ 855 000

$ 1 455 399

$

$ 139 400

$ 142 869

$ 1 148 130

NOV

25 000

$ 2 481 221

$ 726 000

$ 120 000

$ 846 000

$ 1 755 221

$

$ 114 600

$ 175 120

$ 1 440 501

DEC

Business plan 661

$

$

$

$ 145 000

$ 1 527 000

Other Current Liabilities

Subtotal Current Liabilities

Long-term Liabilities

Total Liabilities

Paid-in Capital

$ 1 300 000

$ 1 445 000

$ 1 300 000

Total Capital

Total Liabilities and Capital

Net Worth

0

$

($227 000)

50 000

95 000

Earnings

Retained Earnings

25 000

$

Current Borrowing

50 000

20 000

Accounts Payable $

Current Liabilities

Liabilities and Capital

PRO FORMA BALANCE SHEET

51 000

35 000

50 000

$ 1 257 557

$ 1 569 339

$ 1 257 557

($44 443)

($227 000)

$ 1 529 000

$ 311 782

$

$ 261 782

$

$

$ 175 782

JAN

52 100

46 000

8 323

50 000

$ 1 240 477

$ 1 396 900

$ 1 240 477

($63 803)

($227 000)

$ 1 531 280

$ 156 423

$

$ 106 423

$

$

$

FEB

53 310

58 100

12 620

50 000

$ 1 234 873

$ 1 408 903

$ 1 234 873

($72 006)

($227 000)

$ 1 533 879

$ 174 030

$

$ 124 030

$

$

$

MAR

54 641

71 410

85 555

50 000

$ 1 224 766

$ 1 486 372

$ 1 224 766

($85 076)

($227 000)

$ 1 536 842

$ 261 606

$

$ 211 606

$

$

$

APR

56 105

86 051

28 726

50 000

$ 1 235 155

$ 1 456 038

$ 1 235 155

($78 065)

($227 000)

$ 1 540 220

$ 220 882

$

$ 170 882

$

$

$

MAY

53 118

57 715

50 000

$ 1 260 640

$ 1 523 629

$ 1 260 640

($56 431)

($227 000)

$ 1 544 071

$ 262 989

$

$ 212 989

$

$ 102 156

$

JUN

58 486

99 000

$ 1 285 356

$ 1 713 372

$ 1 285 356

41 449

59 434

98 000

$ 1 347 702

$ 1 683 945

$ 1 347 702

21 236

($227 000)

$ 1 553 466

$ 336 243

$

$ 238 243

$

$ 137 360

$

AUG

($36 105) $

($227 000)

$ 1 548 461

$ 428 015

$

$ 329 015

$

$ 118 872

$ 151 657

JUL

64 405

60 577

97 000

$ 1 437 233

$ 1 817 012

$ 1 437 233

$ 105 061

($227 000)

$ 1 559 172

$ 379 779

$

$ 282 779

$

$ 157 797

$

SEP

61 934

$ 1 544 638

$ 2 109 383

$ 1 544 638

$ 205 961

($227 000)

$ 1 565 677

$ 564 745

$ 146 000

$ 418 745

$

$ 180 378

$ 176 433

OCT

78 615

63 527

$ 1 707 940

$ 2 200 399

$ 1 707 940

$ 361 847

($227 000)

$ 1 573 093

$ 492 459

$ 145 000

$ 347 459

$

$ 205 317

$

NOV

65 379

$ 1 927 107

$ 2 481 221

$ 1 927 107

$ 572 560

($227 000)

$ 1 581 547

$ 554 115

$ 144 000

$ 410 115

$

$ 232 850

$ 111 886

DEC

662 Appendix

Business plan 663

ENDNOTES 1 Cahn, M. (2008). Indigenous entrepreneurship, culture and microenterprise in the Pacific Islands: case studies from Samoa. Entrepreneurship & Regional Development, 20(1), 1–18; Fairbairn, T. o. I. J. (2006). Entrepreneurship and small business development: A Pacific perspective. Journal of Small Business & Entrepreneurship, 19(4), 355–65; Gray, B. J., et al. (2014). Encouraging sustainable entrepreneurship in climate-threatened communities: A Samoan case study. Entrepreneurship & Regional Development, 26, 401–30. 2 CIA World Fact Book, https:// www.cia.gov/library/publications/theworld-factbook. 3 Samoa. Ministry of Agriculture, Forests, Fisheries and Meteorology (2004). The Feasibility of Reviving Cocoa as a Major Industry: Strategic Overview, Ministry of Agriculture, Forests, Fisheries & Meteorology. 4 Tuulima Laiti, Private correspondence March, 2012 based on field surveys and the Agriculture Tabulation Report, 2010. 5 Samoa Bureau of Statistics and Ministry of Agriculture & Fisheries. Agriculture Census Analytical Report. 2009. http://catalog.ihsn.org/index.php/ catalog/4137/study-description. 6 Mark Schatzker. Chocolate: Can science save the world’s most endangered treat? BloombergBusiness.com, 14 November 2014. http://www.bloomberg.com/news/ 2014-11-14/to-save-chocolate-scientistsdevelop-new-breeds-of-cacao.html. 7 Roberto Ferdman. The world’s biggest chocolate-maker says we’re running out of chocolate. Washington Post, 15 November 2014. http:// www.washingtonpost.com/blogs/ wonkblog/wp/2014/11/15/the-worlds-

Appendix

biggest-chocolate-maker-says-wererunning-out-of-chocolate. 8 International Cocoa Organization. ICCO Statement on Reports of a Cocoa Supply Deficit in 2020. http://www.icco.org/ about-us/icco-news/270-icco-statementon-reports-of-a-cocoa-supply-deficit-in2020.html. 9 Jonathan Webb. Facility opens to safeguard the future of chocolate. BBC, 2 January 2015. http://www.bbc.com/news/ science-environment-30641613. 10 KPMG. A taste of the future: The trends that could transform the chocolate industry by John A. Morris. June 2014. http://www.kpmg.com/global/en/ issuesandinsights/articlespublications/ pages/taste-of-the-future.aspx. 11 Jean-Marc Anga, Executive Director, International Cocoa Organization. The world cocoa economy: Current status, challenges and prospects. 9 April 2014. http://unctad.org/meetings/en/ Presentation/SUC_MEM2014_ 09042014_ICCO.pdf. 12 Euromonitor. The Chocolate League Tables 2014. http://www.targetmap.com/ viewer.aspx?reportId¼38038. 13 La¨derach, P. et al. (2013). Predicting the future climatic suitability for cocoa farming of the world’s leading producer countries, Ghana and Coˆte d’Ivoire. Climatic Change, 119(3–4), 841–54. Anchors, Z. (2012). Climate change on the menu. Restaurant Business, 111(2), 14; Ofori-Boateng, K. & B. Insah (2014). The impact of climate change on cocoa production in West Africa. International Journal of Climate Change Strategies and Management, 6(3), 296–314; Oyekale, A. S. (2012). Impact of climate change on cocoa agriculture and technical efficiency of cocoa farmers in south-west Nigeria. Journal of Human Ecology, 40(2), 143–8;

Oyekale, A. S. (2012). Vulnerability of peasant cocoa farmers to climate change in south-west Nigeria. Journal of Human Ecology, 40(1), 33–41; Pacyniak, B. (2011). Dealing with climate change. Candy Industry, 176(11), 8–8; Schmitz, H. & H. Y. Shapiro (2012). The future of chocolate. Scientific American (International Edition), 306(2), 50–5; Susan, B. (2011). Bitter sweet chocolate: from ground to mouth. Geography Bulletin, 43(4), 20–33; Wanger, T. C. (2014). Cocoa shortfall: Pollination curbs climate risk to cocoa. Nature, 511(7508), 155. 14 LOHAS. The LOHAS marketplace: $209 billion strong (and growing). http:// www.lohas.com/journal/ maketsize2005.html. 15 A 2011 Mobium Study says more than 4 million Australians (25 per cent of the adult population) are aligned to LOHAS, and will spend $15 billion this year on products that are friendlier to the environment, Indigenous peoples and personal health. 16 Terri Mercieca, Artisan Chocolate Production. The George Alexander Foundation/ISS Institute Fellowship. See more at: http://www.issinstitute.org.au/ fellowships/fellowship-reports/art-anddesign/#sthash.mw5co580.dpuf. 17 This is from KPMG’s survey verbatim. https://www.kpmg.com/NL/nl/ IssuesAndInsights/ArticlesPublications/ Documents/PDF/Sustainability/A-tasteof-the-future.pdf, p. 3. 18 KPMG, A taste of the future: The trends that could transform the chocolate industry, June 2014. Copyright: ª 2014 KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.

664 Glossary

GLOSSARY allowance for uncollectable accounts Accounts receivable judged

bank loan Long-term liability due to

to be uncollectable.

bankruptcy A legal status of an

angel capital Investment in a business to provide equity capital by an affluent individual.

organisation or a person who cannot pay their debts to creditors to whom they owe money.

accounts payable Liabilities

anthropocene extinction event Ongoing mass extinction of

incurred when goods or supplies are purchased on credit.

species during the modern era, for the past 10 000 years.

accounts receivable Money that is owed to a company by a customer for products and services provided on credit. Treated as a current asset on a balance sheet.

anthropogenic Caused by human beings and generally refers to their impact on nature, e.g. anthropogenic air pollution.

barriers to entry Elements restricting an emerging industry, such as proprietary technology, access to distribution channels, access to raw materials and other inputs, cost disadvantages due to lack of experience, and risk.

accounts receivable financing Involves either the pledge

A relationship among things and people existing in the world in relation to other things and other people.

A absolutist ethics The belief that there are absolute standards against which moral questions can be judged, and that certain actions are right or wrong, irrespective of the context of the act.

of receivables as collateral for a loan or the sale of receivables (factoring).

accrual system of accounting A method of recording and allocating income and costs for the period in which each is involved, regardless of the date of payment or collection. For example, if you were paid $100 in April for goods you sold in March, the $100 would be income for March under an accrual system. (Accrual is the opposite of the cash system of accounting.)

achievement Accomplishing a business goal successfully through skill, risk-taking or perseverance.

adaptation Changing practice due to

appositional relationship

arbitrage In simple terms it is the practice of taking advantage of a price difference between two or more markets to make a risk-free profit through trading between the different markets with different market prices.

Asia–Pacific Political and economic term used to designate the economies on the edges of the Pacific Ocean as well as the various island nations within the region. asset protection A way to organise assets and transactions in such a way that personal assets (such as the family home) are shielded from future liabilities or business failure.

the new biophysical conditions; that is, adapting to changes in temperature, sea level, storm patterns and so forth. (See also mitigation.)

assets Anything of value that is owned by you or your business.

adaptive firm A venture that

Bai’ al ‘inah A term of Islamic

remains adaptive and innovative both through and beyond the growth stage.

administrative expenses An overhead cost associated with managing business affairs not directly attributable to sales, marketing, production or service delivery.

affordable loss The level of loss that can be endured by an entrepreneur or a business that can be reasoned to be affordable in order to explore the potential of an opportunity.

Glossary

a loan from a lending institution.

bear markets Unfavourable markets associated with falling prices and investor pessimism. better widget strategies A strategy that leverages unique products that open up existing markets or stake out new markets.

biobank A type of biorepository that stores biological samples. Well used in human medical research, they are now being used to preserve biodiversity. biodiversity The variety of plant and animal life found in an ecosystem and the variation in their genetic make-up. Biodiversity is a measure of the health of an ecosystem, with healthy ecosystems having greater variety and variation in plant and animal life than unhealthy ones.

biodiversity offsets Comes from the concept of biodiversity banking. Applying market solutions to improving biodiversity. biomass The total mass of all the

B finance, it means a sale and buy-back agreement between a financing facility and an entrepreneur.

Bai Salam A term of Islamic finance, this is an advance-paid contract to deliver goods (fully specified leaving no ambiguity leading to dispute) at a later date. balance sheet An itemised statement listing the total assets, liabilities and net worth of your business at a given moment.

living organisms in a given area, population, habitat or trophic level, often expressed as kg/ha.

bioprospecting The process of discovery and commercialisation of new products based on biological resources. biosphere All ecosystems on Earth as well as the Earth’s crust, waters and atmosphere on and in which organisms exist; also, the sum of all living matter on Earth.

Blue Ocean Strategy The strategy of seeking a market space that is not

Glossary 665

yet contested or that remains unidentified by competitors. Also the strategy of creating new market spaces to avoid the tightly held known markets that competitors hotly contest for customers.

demonstrating a clear method of getting to the market for sales.

business plan The written document

bootstrapping A means of starting a

that details a proposed venture. It must illustrate current status, expected needs and projected results of the new business.

new venture through highly creative acquisition and use of (sometimes other people’s) resources. (See also incrementalist approach.)

buy/sell agreements An agreement designed to handle situations in which one or more of the entrepreneurs wants to sell their interest in the venture.

born global A company that goes global from its very ‘birth’. It rapidly expands on the world market without conquering the domestic market first.

break-even analysis The method of determining the point at which a company makes neither a profit nor a loss. The break-even point for a product is the point where total revenue received equals total costs.

bribery A corrupt activity in which a person offers or receives goods, money, services, etc. to sway another person’s opinion, action or decision. Brundtland Report Our Common Future is a report from the United Nations World Commission on Environment and Development (WCED) and was published in 1987.

budget A statement of estimated income and expenses over a specific period of time.

C calculated risk taking An entrepreneurial behaviour whereby information and/or expertise is sought to evaluate whether the risk involved in pursuing an opportunity is calculable and worthy of the potential loss. Cantillon, Richard 1680s–1734, an

revenues and/or rise in expenses are of such magnitude that the firm becomes insolvent.

capital (1) The amount invested in a business by the proprietor(s) or shareholders. (2) The money available for investment or money invested. expenditures on assets whose returns are expected to last beyond one year.

capital budgeting A budgeting

capitalism An economic system based on private ownership of the means of production. Individuals, companies or corporations invest in, own and share in profits (or losses) of the entities that produce goods, distribute products or provide services.

business formation The act and procedures of starting a business.

carbon emissions Emissions to the atmosphere principally from the burning of fossil fuels and deforestation.

business model How a venture is

carbon footprint The carbon

designed to make money,

Glossary

carrying capacity The supportable population given the food, habitat, water and other necessities available within an environment without degrading natural capital for future generations.

movement of money within a business venture including all outflows and inflows usually measured for a specified period of time either in the past or in the future. For a business venture the flow of money in must provide timely coverage for any necessary flows of money out of the business venture.

refers to costs associated with buying machinery, equipment, property and other fixed assets that provide longterm benefit.

process used to determine investment decisions. It relies heavily on an evaluation of cash inflows.

business failure When a fall in

job and benefits often experience this when they consider whether they can go back to their old job if their venture should fail.

capex Short for ‘capital expenditure’,

business angel A private investor

by the profit motive (as distinguished from social entrepreneurs). They seek growth and profits within the business world.

career risk Managers with a secure

cash Coins, currency and cheques on hand. It also includes money that the business has in its cheque and savings accounts.

capital budget Used to plan

business entrepreneurs Are driven

carbon sequestration Removing carbon from the atmosphere and depositing it in a reservoir such as soil, trees and plants, geological formations and oceans. Reduces greenhouse gas and global warming.

Irish-French economist and author of Essai sur la Nature du Commerce en Ge´ne´ral (Essay on the Nature of Trade in General), was first to introduce the term entrepreneur into economics.

build-out allowances In a lease contract, the landlord will sometimes give an amount to the tenant to buildout the premises. who contributes money and experience to early stage investments.

environment in terms of the amount of greenhouse gases produced, measured in units of carbon dioxide.

footprint is a measure of the impact that human activities have on the

cash flow A measure of the

cash-flow budget A budget that provides an overview of inflows and outflows of cash during a specified period of time. cash-flow statement A financial statement that sets forth the amount and timing of actual and/or expected cash inflows and outflows.

champion A person with a vision and the ability to share it.

classical liberalism A political ideology committed to limited government and liberty of individuals including freedom of religion, speech, press, assembly and free markets.

climate change The change in global climate patterns apparent from the mid to late 20th century onwards, attributed largely to the increased levels of atmospheric carbon dioxide produced by the use of fossil fuels.

666 Glossary

climate change economics A conceptual framework for considering climate change as an economic problem, that examines public policies and the trade-offs among them, and discusses the potential complications and benefits of international coordination.

co-creation Two or more parties

decision-making process, both individually and in groups.

individuals for the protection of their literary or artistic productions.

consumer characteristics

corporate angels A type of angel

Variables (such as income, occupation, education, perceptions and self-concept) that distinguish one group from another.

investor, typically senior managers who have been laid off with generous severances or have taken early retirement.

consumer-driven philosophy

corporate entrepreneurship The entrepreneurial behaviour of people within large firms and organisations. Other related terms include intrapreneurship, innovation or venturing. In this book we use the word intrapreneurship.

collaborating to produce a product or service or other outcome that has shared benefit. Usually involving the customer as one party in a marketing sense but other co-creators may be suppliers or investors.

A marketing philosophy that relies on research to discover consumer preferences, desires and needs before production actually begins. (See also product-driven and sales-driven philosophy. One of three dominant marketing philosophies.)

cognition It refers to mental processes. These processes include attention, remembering, producing and understanding language, solving problems, and making decisions.

consumer pain Something that you

Corporate Entrepreneurship Assessment Instrument (CEAI)

actually solve by your venture. Satisfy the needs, fears and desires of the consumer. The cracks in the footpath that everyone is walking around.

A questionnaire designed to measure the key entrepreneurial climate factors within a corporate entity or established business environment.

collective entrepreneurship Individual skills integrated into a group wherein the collective capacity to innovate becomes something greater than the sum of its parts.

consumer pricing A pricing decision method which is derived by understanding the value consumers (or customers) place on a product and the price they will pay for that value.

corporate responsibility for a sustainable environment When

co-marketing Also known as co-

contract manufacturing

corporate social responsibility A business process that guides a company’s activities in the protection and promotion of international human rights, labour and environmental standards by minimising their environmental impact, adhere to international labour standards, contribute to their communities and manage towards a more economically sustainable world.

promotion, this means two or more companies cooperating to market or promote each other’s products.

commercialisation The process of introducing a new product into the market. Sequence of actions necessary to achieve market entry and general market competitiveness of new innovative technologies, processes, and products.

common shares Represents part ownership of a company. Holders of common shares have voting rights but no guarantee of dividend payments. Note: The word ‘stock’ is used in the US instead of ‘shares’.

competitor analysis The quality and quantity of the competition, which needs to be carefully scrutinised by the entrepreneur.

comprehensive feasibility analysis A systematic analysis incorporating external factors.

consumer behaviour Study of how people buy, what they buy and why they buy. It is a subcategory of marketing that blends elements from psychology, marketing and economics. It attempts to understand the buyer

Glossary

A contractee/manufacturer assembles the product under a contract arrangement.

contribution margin approach A company’s contribution margin is the percentage of each sale that remains after the variable costs are subtracted.

convertible debentures Loans to a company made by investors, as opposed to loans raised from a bank. The investors receive a fixed rate of interest. Debentures may be ‘convertible’ into shares or ‘redeemable’ for cash at a specified future date.

cooperative society A cooperative operates on a service motive that provides services to its members and any return of capital is limited. Unlike a company, all members of a cooperative have only one vote, irrespective of their shareholding. copreneur Copreneurs are couples who have a personal relationship in addition to a business relationship. co-production A relationship in which companies agree to manufacture each other’s products.

copyright A legal protection that provides exclusive rights to creative

companies look at the degradation of the planet’s assets and the part they can play in stopping it.

corporate venturing Another word for intrapreneurship or corporate entrepreneurship. corporation In the US, a corporation is a legal business entity that often has similar rights in law to those of a natural person. In Australia, New Zealand and Singapore, as well as in the UK and Ireland, this is known as an incorporated company. They both have limited liability and their shareholders are not normally responsible for the company’s debts beyond the amount they paid for their shares. Accordingly, while the terminology differs, the concept of a company or corporation is largely the same. corruption Corruption is defined as the abuse of power for private gain. It

Glossary 667

is an organised system of improper conduct such as bribery, extortion and influence peddling.

cost of borrowings Cash required over a given period for the repayment of interest and principal on a debt. Also called debt servicing. cost of goods sold (cogs) The value of products sold to customers in a period. This is determined by subtracting the value of the ending inventory from the sum of the beginning inventory and purchases made during the period. Gross sales less cost of goods sold give you gross profit.

cradle-to-cradle The idea that at the end of life any product can be turned into something else to close the cycle so that ultimately there is no waste.

creative process A process of exploration, selection, combination, refinement and reflection to create a new idea or innovation.

creativity The generation of ideas that results in improved efficiency or effectiveness of a system.

D dark side of entrepreneurship A destructive side existing within the energetic drive of successful entrepreneurs.

debt financing Financing in which you get a loan and go into debt. You are obliged to repay the loan at a predetermined interest rate.

debt servicing See cost of borrowings.

deforestation Destruction of forests to make land for agriculture. Cutting down trees, which provide oxygen and absorb carbon dioxide, is seen as a cause of increased greenhouse effect. Deforestation also entails the destruction of animal habitats.

demand-oriented pricing Typical of the maturity stage of the product life cycle (e.g. when sales growth declines), this is a flexible strategy that bases pricing decisions on the demand level for the product.

depreciation Lost usefulness; expired

cross-licensing This is what

utility, the diminution of service yield from a fixed asset or fixed asset group that cannot or will not be restored by repairs or by replacement of parts.

happens when a firm grants a licence to another firm to exploit proprietary rights in its patents, copyrights, trademarks, trade secrets and so forth.

desertification When an area begins to develop desert-like conditions due to lack of water, deforestation, overgrazing and overcropping.

crowdfunding Crowdfunding is the

design registration A means to protect the way a product looks, its shape and/or configuration in either two-dimensional detail representing the product’s pattern or the threedimensional visual appearance.

critical factors Important newventure assessments.

practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet.

current assets Items on the balance sheet listed as assets such as cash, accounts receivable, inventory and short term investments that can be converted to cash and/or used to pay current liabilities within 12 months.

diaspora entrepreneurs Diaspora

disclosure Information relevant to specific transactions that is required by law.

displacement school of thought Views the factors that prevent (or displace) a person from doing other activities, such as a political regime or a regulatory environment that blocks free enterprise; cultural aspects that might prevent a person from choosing self-employment; or economic factors such as job loss or even full employment that might affect one’s choice to become an entrepreneur.

dividends Cash, shares or other assets from an incorporated company’s profits distributed to shareholders, an equal amount for each share owned. Paid from the total net earnings. Retained earnings are what remain after that.

domain name The last part of a URL that includes the organisation’s unique name followed by its organisational form, such as .com for ‘commercial’ or .edu for ‘educational’. dotcom crash End of the speculative IT bubble covering roughly 1995–2001. double bottom line Creation of both a financial and social return on investment. (See also triple bottom line.) double taxation Double taxation is a situation in which taxes must be paid for the same asset or financial transaction in different countries, either by corporations or by individuals.

down-cycling Recycling of a material into a material of lesser quality. drive to achieve A strong desire to compete, to excel against self-imposed standards, and to pursue and attain challenging goals.

pay within a year (also called shortterm liabilities).

(from Greek diasporþ) means people who are scattered from their original homelands. Diaspora entrepreneurs support their home countries by sending remittances, and combining local business know-how with knowledge of their home countries.

customer availability Having

direct foreign investment

duplication Creative replication of an

A domestically controlled foreign production facility involving ownership of 10–25 per cent of the voting shares in a foreign enterprise.

existing concept, such as taking pizzas and making Pizza Hut.

current liabilities Debts you must

customers available before the venture starts.

customisation Refers to the production of a good or service particularly tailored to a specific customer’s need.

Glossary

disadvantaged entrepreneurs Entrepreneurs who come out of a background of hardship or suffering.

due diligence A process undertaken by potential investors to analyse and assess the desirability, value and potential of an investment opportunity.

durable competitive advantage In marketing and strategic management an advantage that one company has relative to competing companies.

668 Glossary

dynamic capabilities The strategic capabilities that lead a business to change the what, the how and/or the why it does what it does.

ecopreneurship The study and practice of nascent and new business owners who innovate, upcycle and offer environmentally friendly services, goods and technology.

E

ecosystem All the organisms in a community, together with the associated physical environmental factors (living and non-living) with which they interact.

early stage financing Provided to companies that have completed the product development stage and test marketing as well, but require additional financing to expand commercial manufacturing and sales.

ecological concern The belief that today’s environmental problems are a result of industrial and personal disregard for the environment.

ecological fatalism The belief that some amount of pollution is unavoidable in industrial societies and accept it as a part of life. ecological school of entrepreneurial thought The perception of the natural world and our relationship to it as entrepreneurs. Based on the idea that everything is related with everything everywhere. Focuses on intergenerational equity, irreversibility of environmental change, uncertainty of long-term outcomes, and sustainable development.

ecotourism Nature-based tourism that respects the culture, natural history and environment of destinations and seeks to minimise the negative impact of travel on the environment.

effectual logic An approach to entrepreneurial strategy, popularised by Saras Sarasvathy, that is unconstrained by either limited resources or fixed objectives. Eisenhower recession From 1953– 55, a post-Korean War inflationary period when funds were transferred into national security. electronic waste Discarded computers, office electronic equipment, entertainment device electronics, mobile phones, television sets and refrigerators.

ecology of commerce Based upon Paul Hawken’s book by the same name (1994), the concept means the environmentally destructive aspects of many current business practices along with businesses adopting new practices to promote environmental restoration.

elevator pitch The brief oral presentation for selling a business plan to potential investors (named for the analogy of riding an elevator and having only two minutes to get your story told to another person in the elevator).

economic capital Economic capital

embodied water The amount of

is composed of both finance capital (cash, money) and manufacturing capital (manufacturing plants and other physical assets).

economic growth Increase in the capacity of an economy to produce goods and services as well as to improve the wellbeing of its citizens.

econosphere Total capital stock; that is, the set of all objects, people, organisations and so on, which are interesting from the point of view of the system of exchange.

ecopreneur Combines the unrelenting drive and imagination of the entrepreneur with the stewardship of a conservator.

Glossary

water used during the growing, processing and transportation of the goods we use or consume, or the services we use.

employee stock ownership plans (ESOPs) Passing control of the enterprise to the employees if the owner has no immediate successor in mind.

enterprise Enterprise – as in an enterprising individual – is the process of identifying, developing and bringing a vision to life, be it an innovative idea or simply a better way of doing something. Enterprise applies not only to business ventures, but also to political decisions and social decisions.

entomophagy The consumption of insects as food.

enthusiast angels Angels that simply love to be involved in deals. Typically play no role in management and rarely seek to be placed on a board.

entreprendre French verb meaning to undertake, begin, start (upon), embark upon. entrepreneur (1) An innovator or developer who recognises and seizes opportunities; converts these opportunities into workable/marketable ideas; adds value through time, effort, money or skills; assumes the risks of the competitive marketplace to implement these ideas; and realises the rewards from these efforts. (2) An individual who organises and manages labour, capital and natural resources to produce goods and services to earn a profit, but who also runs the risk of failure.

entrepreneurial A person is entrepreneurial if they have the mind-set to spot opportunities, have a social or enterprising spirit, are willing to take calculated risks, and wish to enjoy a good outcome for themselves and the community. entrepreneurial angels The most prevalent type of investor is the entrepreneurial angel. Most of these individuals own and operate highly successful businesses. entrepreneurial capabilities The set of skills and abilities of an individual that support identifying an entrepreneurial/business opportunity and developing the resource base needed to pursue an opportunity.

entrepreneurial career A career that involves the work and effort required to spot opportunities and pursue new endeavours or ventures.

entrepreneurial characteristics The set of attitudes, behaviours and character traits associated with an individual who identifies opportunities and gathers the needed resources to pursue a new endeavour or venture.

entrepreneurial cognition How entrepreneurs perceive, recognise, conceive, judge, sense, reason, remember and imagine.

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entrepreneurial crime Punishable acts to benefit the entrepreneur personally. entrepreneurial ecocide Largescale environmentally catastrophic business activities by an entrepreneur.

entrepreneurial ecology Focuses on the sustainable combination of environment and entrepreneurship. Entrepreneurial ecology shifts the entrepreneurial process from linear (open loop) systems, in which resource and capital investments move through the system to become waste, to a closed loop system where wastes become inputs for new processes. entrepreneurial economy A new emphasis on entrepreneurial thinking that developed in the 1980s and 1990s and is prevalent now in the twentyfirst century.

entrepreneurial ecosystem An area or region that nurtures, sustains and supports entrepreneurs to start, grow and harvest new business ventures. It contains individuals, organisations and/or institutions that are either drivers or inhibitors to a person becoming an entrepreneur and being able to sustain a start-up business through growth and success.

entrepreneurial ethics Moral principles that govern an entrepreneur’s behaviour. Presume the entrepreneur is always seeking an ‘honourable course of action’.

entrepreneurial impact loops When a proportion of an entrepreneur’s product or service is returned (fed back) to nature. It can be positive or negative.

entrepreneurial leadership An entrepreneur’s ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a viable future for the organisation.

entrepreneurial marketing The proactive identification and exploitation of opportunities for acquiring and retaining profitable customers through innovative approaches to risk management, resource leveraging and value creation.

Glossary

entrepreneurial marketing plan Part of a company’s overall

entrepreneurial vision See vision. entrepreneurship The practice of

strategic effort, this plan promotes the restless pursuit of opportunity, an obsession with the customer and a focus on sales above all else.

starting new organisations, particularly new businesses. The process of innovation and new-venture creation. The commercialisation of innovation.

entrepreneurial mind Describes the mind of an entrepreneur and the way they think about, make decisions and view the world and its opportunities for new ventures.

entrepreneurship education Programs devoted to

entrepreneurial mind-set All the characteristics and elements that compose the entrepreneurial potential in every individual.

raising the level of enterprise and new venture creation, usually within secondary and tertiary (university) levels.

entropy When natural (or even business) systems run down or become depleted, we call this entropy.

entrepreneurial motivation The willingness of an entrepreneur to sustain his or her entrepreneurial behaviour.

Entwicklung Broadly speaking, the

entrepreneurial opportunity An opportunity for the creation of a new venture that can obtain an identified and superior competitive advantage and provide a profitable return to its investors.

environmental crime Illegal acts

Entrepreneurial Revolution Throughout the world,

practice of individuals, organisations and/or governments to protect the natural environment from harm and preserve it for the benefit of current and future human generations.

there is compelling evidence linking entrepreneurship and economic performance, including job creation, growth, firm survival, innovation and technological change, productivity increases and exports.

entrepreneurial risk See risk. entrepreneurial strategy Strategies that underpin long-range plans for the effective management of opportunities and threats in light of an entrepreneur’s, an entrepreneurial team’s or a venture’s, strengths and weaknesses.

entrepreneurial stress A function of discrepancies between one’s expectations and one’s ability to meet those demands.

entrepreneurial successor A successor to a venture who is highly gifted with ingenuity, creativity and drive.

entrepreneurial trait school of thought One of the micro views of entrepreneurship, this seeks to identify traits common to successful entrepreneurs (e.g. achievement, creativity, determination and technical knowledge).

global movements for conserving the environment and ensuring sustainable use of natural resources for the future. that harm the environment such as illegal wildlife trade in endangered species, waste smuggling and dumping, and illegal fishing.

environmental protection The

equity capital Owners who have put some funding into the business in order to finance start-up operations. equity financing The sale of some ownership in a venture in order to gain capital for start-up.

ethical wealth creation Investing in projects that promote a better world for all. ethics A set of principles prescribing a behavioural code that explains what is good and right, or bad and wrong. ethnic entrepreneurs Small and medium-size businesses owned by ethnic or immigrant entrepreneurs and their co-ethnic helpers and workers sharing common national background or migration experiences.

eureka factor Attributed to Archimedes, it means ‘I have found it’. It is used to celebrate a discovery. existential risk A possible event with the potential of seriously damaging human well-being around the world.

670 Glossary

Possible events include: volcanic eruptions, pandemics, nuclear accidents, climate change or bioterrorism.

product, service or process already in existence.

families and their communities that can be used in business development.

external locus of control The

feasibility criteria analysis

exit strategy Methods by which the

perception of the factors responsible for the outcome of an event. An individual with an external locus of control believes the outcome was determined by outside forces.

A criteria selection list from which entrepreneurs can gain insights into the viability of their venture.

initial investors in a company can liquidate their investment. The two most common exit strategies are either to take the company public by an initial public offering (IPO) or to sell the company to another firm.

expansion financing Financing for a company that is viable and is reaching break-even, usually used to increase production capacity, market or product development.

expenses An expired cost; any item or class of cost of (or loss from) carrying on an activity; a present or past expenditure defraying a present operating cost or representing an irrecoverable cost or loss; an item of capital expenditures written down or off; a term often used with some qualifying expression denoting function, organisation or time, such as a selling expense, factory expense, or monthly expense.

experimentation A form of research that concentrates on investigating cause-and-effect relationships. export consortium A joint bid by several small firms on a foreign project. export management company A firm that serves as an export department for a manufacturer by soliciting business and exporting the product(s) for the client in return for a commission, salary or retainer plus commission.

exporting Participating actively in the international arena as a seller rather than a buyer.

exporting social entrepreneur This refers to the originator of social innovation who has implemented it already in other locales. The ‘exporting’ social entrepreneur can demonstrate that the innovation has generated improvements in social wellbeing in other locales and that the innovation fills an important gap (or entrepreneurial pain) in other populations. (See also importing social entrepreneur.)

extension A basic type of innovation that involves extending the life of a

Glossary

external optimism Ceaseless optimism emanating from entrepreneurs as a key factor in the drive towards success.

F 4Fs Friends, family, founders and other ‘foolhardy investors’ – types of informal investors.

factoring Process of purchasing commercial accounts receivable (invoices) from a business at a discount.

factors of production The natural resources, labour, capital and entrepreneurship used to create the goods and services desired by people. fair use doctrine An exception to copyright protection that allows limited use of copyrighted materials.

familiness Those unique resources that emerge from interactions between the family system as a whole, the individual family members and the business itself. family and social risk Starting a new venture uses much of the entrepreneur’s energy and time. Entrepreneurs who are married, and especially those with children, expose their families to the risks of an incomplete family experience and the possibility of permanent emotional scars. In addition, old friends may vanish slowly because of missed get-togethers. family emotional capital The passion that unites a family over generations of business ownership. family life cycle The changing priorities and resulting consumer behaviour over the life cycle of teens, through courting, nest building, full nest, empty nest and sole survivor.

family social capital Goodwill among family members and between

finance companies Asset-based lenders that lend money against assets such as receivables, inventory and equipment. financial capital Sometimes just called ‘money’, this is what entrepreneurs use to leverage other resources in the process of making products and services for the marketplace. financial/capital school of thought Refers to the need for capital and focuses on the relationship between entrepreneurs and investors, funding sources, returns for investors and entrepreneurs and performance of entrepreneurial investments, and public policy issues.

financial ratio analysis Financial ratio analysis provides a way of organising and interpreting information from financial data. This analysis quantifies relative performance by analysing the ratio of one performance measure against another and is used to manage a firm’s performance by comparative analysis with industry standards or other benchmarks derived from similar firms.

financial ratios A financial ratio is a ratio of two numbers of reported levels or flows of a company, e.g. two financial flow categories: profit/ revenue or earnings/equity. financial risk The money or resources at stake for a new venture. financial statement An accounting term for an account or formal record that shows the financial activities of a firm, person or other entity. First Gulf War Fought between Iraq and a coalition led by the US that freed Kuwait from Iraqi invaders; 1990–91.

Five Capitals There are five types of capital from which we derive the goods and services we need to improve the quality of our lives: financial, manufactured capital, human, social and natural.

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five forces model Michael Porter’s famous five forces that determine the competitive intensity and market attractiveness in the context of profitability. A very unattractive industry would be one approaching ‘pure competition’. five-minute reading A process venture capitalists use when they are reviewing a business plan for potential investment.

fixed assets Land, building, equipment and other assets expected to remain with the firm for an extended period.

fixed cost Part of the operating budget, a cost that does not change in response to changes in activity for a given period of time. Rent, depreciation and certain salaries are examples. (See also variable costs and mixed costs.)

flow-through taxation All business losses, profits and expenses flow through the company to the individual members, thus avoiding double taxation of paying corporate tax and individual tax.

focus groups A qualitative market research technique where 8–12 market participants are gathered in one room for a discussion under the leadership of a trained moderator. Discussion focuses on a consumer problem, product or potential solution to a problem. The results of these discussions cannot be projected to the general market. food entrepreneurs Entrepreneurs dealing with new and innovative ways to store, move, grow and develop food products.

foreign distributors The foreign distributor takes title to the goods in the home country of the distributor and has to resell them down the distribution chain.

generalised Darwinism Using Darwinism to analyse social-economical systems. For example, there might be an entrepreneurial gene that when selected led communities to prosper.

fossil fuels Coal, oil or natural gas that result from the fossilisation of ancient plants or animals. These fuels have taken millions of years to form.

Generation E As opposed to

franchise Any arrangement in which the owner of a trademark, tradename or copyright has licensed others to use it to sell goods or services.

franchise fee Fee that a person pays to operate a franchise branch of a larger company and enjoy the profits therefrom.

franchisee An independent business (the franchisee) sells or markets the products and/or services of a larger firm (the franchisor). The franchisee receives training and marketing support from the franchisor and pays a fee for ongoing support. franchising A form of licensing that involves selling the rights to a complete package of trademarks, processes, technologies, designs and copyrights, as they are all involved in the operation of a specific business.

franchisor A company or person that grants franchises. free enterprise capitalism Private ownership of the means of production and enterprise management that is free and independent from state control. The allocation of productive resources is decentralised and obeys the decisions of free individuals who act guided by their own interest.

food miles Distance that food (or any product) is transported from the time of its production until it reaches the consumer.

free-rider An individual who benefits from another’s work without paying for it.

forcing events Unavoidable events that cause the replacement of the owner–manager. This could be for many reasons, including death, legal problems or mental health.

G

foreign agent In an ‘agency agreement’ the producer retains title until the goods are delivered to the buyer or even to the consumer. The agent merely ‘represents’ the producer but never takes ownership of the goods.

Glossary

gaiapreneurship Entrepreneurship on behalf of an infirm planet. Gaia was the Greek goddess of the earth and mother of the Titans in ancient mythology. gazelle A business establishment with at least 20 per cent sales growth every year (for five years), starting with a base of at least $100 000.

Generation X (who feel they have been ‘X-ed’ out of traditional opportunities), young entrepreneurs have become known as Generation E for ‘entrepreneurship’. Young people are now part of one of the most entrepreneurial generations since the Industrial Revolution.

Generation X Generation X is a term used to describe generations in many countries around the world born from 1965 to around 1980.

genogram A graphic display of a firm’s evolution over time from the perspective of family relationships, medical history, and now even climate change.

geo-engineering Deliberate largescale manipulation of environmental processes so as to change the earth’s climate, in an attempt to counteract the effects of global warming, e.g. reflective aerosols or (atmospheric) dust, cloud seeding, reforestation and space sunshade.

Global Entrepreneurship Monitor (GEM) A global study conducted yearly since 1999 analysing the level of entrepreneurship in nearly one hundred countries.

global financial crisis Also known as the GFC or the ‘Great Recession’, it was the worst financial crisis since the Great Depression of the 1930s and resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market also suffered.

global sourcing Today importing is called global sourcing. A cross-border search for suitable suppliers that meet specific quality, time and price requirements.

global warming A gradual increase in temperature due to greenhouse gases caused by increased levels of carbon dioxide, CFCs and other pollutants.

672 Glossary

goal orientation A predisposition to defining priorities and monitoring progress towards specific high but attainable goals to maintain focus and manage energy when faced with multiple opportunities. goodwill Goodwill is an intangible asset of a company.

governpreneurship Entrepreneurship within the governmental sector.

great chef strategies Leveraging great and unique people with special skills or talents around whom the venture is built. Great Depression Deepest economic decline in history. It began in October 1929 following the collapse of the Wall Street stock market and ended in about 1934.

green marketing Marketing of products that have regard for the environmental consequences of product formulation, marketing, manufacturing and packaging.

greenfield investment A market entry strategy of building everything from the ground up.

greenhouse gases Gases present in the Earth’s atmosphere which reduce the loss of heat into space and therefore contribute to global temperatures through the greenhouse effect.

greenwashing Disinformation disseminated by an organisation so as to present an environmentally responsible public image.

gross profit The difference between revenue (or the income from sales) and the costs associated with producing the goods or services of a business before administration and overheads, interest and taxes are deducted. growth rate The percentage rate of change (usually by year) in any financial characteristic of a company or an economy, such as population, jobs or sales. growth stage The third stage of a new-venture life cycle, typically involving activities related to reformulating strategy in light of the competition.

growth wall A psychological wall against change that prevents

Glossary

entrepreneurs from developing a managerial ability to deal with venture growth.

hydropreneur Entrepreneurs working with water.

guerrilla marketing An unconventional way of performing marketing activities (primarily promotion) on a very low budget.

I

gumboot factory or skunkworks A highly innovative enterprise that uses groups functioning outside traditional lines of authority.

H halal finance ‘Lawful’ or ‘permissible’ types of financing. In Islam there are activities that are prohibited (haram) by the Quran. All other activities, professions, contracts and transactions are halal. harvest plan Family-business entrepreneurs’ decision to sell the venture.

harvest positioning Bringing a high-value company to a trade-sale. Involves effort to put all systems in order, drive up value, secure customers and maximise a company’s assets.

high-growth venture When sales and profit growth are expected to be significant enough to attract venture capital money and/or funds raised through public or private placements.

hire purchase The right to purchase an asset by the user of the asset according to a pre-agreed method. The user may be the owner for tax purposes.

horizontal analysis A technique that involves comparing financial statement amounts and ratios for a particular company from year to year.

human capital Talents and capabilities that individuals contribute to the process of production.

human freedom The power or right to act, speak or think as one wants without hindrance or restraint. The highest expression of freedom is the ability to choose what kind of life one wants to lead, to be the sole proprietor of one’s own destiny. human resources Collective capabilities, experiences, potential and commitment of the entrepreneur, management team and employees.

Ijara Ijara means ‘lease’. The Ijara plan is basically a lease-to-own plan. impact investor A person who invests with the intention to generate a measurable, beneficial social or environmental impact, as well as financial return.

importing Buying and shipping foreign-produced goods for domestic consumption. importing social entrepreneur This refers to the originator of social innovation who has implemented it already in other locales. The ‘importing’ social entrepreneur will be a leader in the adaptation of the innovation into a new context. She or he can show an unmet gap in the communities she or he serves and has the capacity to carry out the implementation and adaptation. (See also exporting social entrepreneur.)

Inc. An incorporated association; that is, a non-profit entity in Australia. But in the US it is a corporation or incorporated company.

income A firm’s income is the difference between total revenues and the total expenses. It is also called the net profit, which in effect is the income of a firm after taxes, depreciation and interest charges are deducted from the operating profit. It is commonly referred to as the ‘bottom line’.

income statement Also called profit and loss (P&L) statement. A statement summarising the income of a business during a specific period. The income statement illustrates the projected operating results based on profit and loss. incongruities Whenever a gap or difference exists between expectations and reality.

incorporated company An incorporated company with the official acronym at the end of its name. While more expensive to set up than as a sole trader, it is legally seen as being quite separate from the owner – a point that can be important should things go wrong.

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incorporated limited partnership (ILP) In Australia, a form of a limited partnership (confusingly entitled a limited liability company or LLC in the US) with the capacity and powers of an individual as well as the powers of a company. Limited partners are not entitled to participate in management and general partners have unlimited liability.

incorporation Incorporation is the birth of a company; it means giving legal form to a company. The Certificate of Incorporation is like a birth certificate. Incorporated businesses become separate legal entities in their own right and are recognised therefore as separate from their owners. incremental innovation Systematic or step-by-step transformation of an existing product or service into something ‘better’. For example, popcorn into microwave popcorn.

incrementalist approach The notion that firms go through a predictable pattern of escalating activities when they develop export strategies – from non-exporting domestic producer through to fully globalised operations. This is the opposite of the ‘born global’ firm.

Indigenous entrepreneurs An Indigenous person creates, manages and develops new ventures by and for Indigenous people. The organisations thus created can pertain to the private, public or non-profit sectors.

Indigenous people Cultural groups that have a historical continuity with a region before its colonisation and who have lived largely independent or isolated from the influence of the larger nation–state. These are people who have maintained at least in part their distinct linguistic, cultural and social/ organisational characteristics. Characteristics common across many Indigenous groups include reliance upon subsistence-based production and a predominantly non-urbanised society. indirect exporting Selling goods to foreign buyers through third parties such as export agents, export merchants or buying houses.

Glossary

individual entrepreneurship As opposed to collective entrepreneurship, the focus here is on the individual self-benefit.

innovation team (I-Team) A team inside a business formulated for the purpose of creating innovations for the firm. (See also venture team.)

individualism Degree of emphasis placed on individual accomplishment rather than on collectivism or group accomplishment.

intellectual property rights (IPR) Provides protection such as

industrial ecology Sustainable combination of the natural environment, the business economy, and technologies and knowledge which link them.

interactive learning Learning ideas within an innovative environment that cuts across traditional, functional lines in the organisation.

industrial entrepreneurship Refers to entrepreneurship during the Industrial Revolution in the late 18th and early 19th centuries when major changes in agriculture, manufacturing, mining and transportation had a profound effect on the socioeconomic and cultural conditions. (See also sustainable entrepreneurship.)

interdisciplinary Relating to more than one branch of knowledge.

industrial metabolism (IM) Collection of physical processes

Intergovernmental Panel on Climate Change (IPCC) A scientific

that convert raw materials and energy, plus labour, into finished products and wastes.

Industrial Revolution Usually dated from 1750 to 1900, the movement from an agricultural economy to an industrial economy based on production of factories and machine labour. A period characterised by many industrial innovations and discoveries. industry environment The structure of one’s industry and how it is likely to evolve over time, as well as the company’s relative position in the industry. Using Porter’s Five Forces Model is a good way to analyse the industry environment.

patents, trademarks or copyrights against infringement by others.

interest The price paid for borrowed money or the return earned from money deposited or lent. interest expense Interest expense on long-term loans, also known as debt service.

intergovernmental body tasked to evaluate the risk of climate change caused by human activity. IPCC shared the 2007 Nobel Peace Prize with former Vice President of the United States Al Gore, and publishes special reports on topics relevant to the implementation of the UN Framework Convention on Climate Change.

internal locus of control The perception of the factors responsible for the outcome of an event. An individual with an internal locus of control believes their actions caused the outcome. internal rate of return (IRR) method The interest rate at which the

remain in motion or to stay at rest unless acted upon by an outside force.

net present value of an investment project is zero; thus, the internal rate of return represents the interest yield promised by a project over its useful life.

informal investors The 4Fs –

Internet marketing Allows the

inertia The tendency of an object to

Friends, Family, Founders and other ‘Foolhardy’ investors (to that we could also add neighbours, work colleagues and even strangers).

initial public offering (IPO) A corporation’s way of raising capital through the sale of securities on the public markets.

innovation The process by which entrepreneurs convert opportunities into marketable ideas.

company to increase its presence and brand equity in the marketplace and cultivate new customers. Allows website visitors to match their needs with the offerings of the company and to serve themselves when and where they choose.

intracapital Special capital set aside for the intrapreneur to use whenever investment money is needed for further research ideas.

674 Glossary

intrapreneurs A person within a large social or business organisation (such as a corporation or a nongovernmental organisation) who takes direct responsibility for turning an idea into reality by going through a process of assertive risk-taking and innovation.

intrapreneurship Entrepreneurial activities that receive organisational sanction and resource commitments for the purpose of innovative results. Americans prefer the term ‘corporate entrepreneurship’. It means the infusion of entrepreneurial thinking into large bureaucratic structures, including corporations and governments.

intraprise A company created by an intrapreneur, a spin-off of a larger company.

invention A basic type of innovation that involves the creation of a new product, service or process that is often novel or untried. inventory Merchandise held by the company for resale to customers.

investing activities Cash-flow effects from long-term investing activities, such as purchase or sale of plant and equipment. The net cash flow from investing activities can be either positive or negative.

investment (1) In finance, the purchase of a financial product or other item of value with an expectation of favourable future returns. In general terms, investment means the use of money in the hope of making more money. (2) In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business. investor protection Guarantee that investments made will not be lost due to misuse of corporate assets by directors for their personal gain, fraud, self-dealing, expropriation, etc.

Islamic finance Islamic entrepreneurs have very tight strictures on what they may and may not transact as business. Islamic finance is based on Islamic law, or sharia, which emphasises justice and partnership.

Glossary

J job creation One of the goals of economic development.

joint production An agreement where companies cooperate to produce goods. Companies may cooperate to make components or even entire products.

joint venture An organisation owned by more than one company – a popular approach to doing business overseas.

K knowledge school of economics Grounded in the works of such economists as Ludwig von Mises (1881–1972) and later Israel Kirzner (1930–), the knowledge school of economics argues that entrepreneurship originates through an uneven distribution of information and knowledge and an entrepreneur has specialist knowledge of markets, industry, technology or networks not generally known by others.

Kyoto Protocol The Kyoto Protocol intends to achieve stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.

L labour regulations The body of laws passed by governments that regulate the legal rights of, and restrictions that apply to employees, workers and organisations.

laissez faire Free from state intervention, including regulations, taxes, tariffs and enforced monopolies. late-stage funding Financing for new product development or introduction, or to support major capacity expansion. Offered before public offering investments for strengthening the company. left brain The part of the brain that helps an individual to analyse, verbalise and use rational approaches to problem solving. (See also right brain.)

legal restraint of trade A legal document signed by the seller of a business that restricts him or her from

operating in the same business for a reasonable amount of time and within a reasonable geographic jurisdiction.

liabilities Amount owing to your creditors. Liabilities can be in the form of a bank loan, accounts payable and so on. They represent a claim against your assets. licensing A business arrangement in which the manufacturer of a product (or a firm with proprietary rights over technology or trademarks) grants permission to a group or an individual to manufacture that product in return for specified royalties or other payments. life cycle stages The typical life cycle through which a venture progresses, including venture development, start-up, growth, stabilisation, and innovation or decline.

life-cycle segmentation A market approach that looks at different age categories of the population based upon the fact that consumer needs and desires change with age. lifestyle venture A small venture where the primary driving forces include independence, autonomy and control. limited liability A restriction on the amount of financial responsibility assumed by a partner or shareholder. (See also unlimited liability.) limited liability partnership (LLP) A relatively new form of partnership that allows professionals the tax benefits of a partnership while avoiding personal liability for the malpractice of other partners.

limited partnerships An organisational arrangement that allows investors to put money into a partnership without assuming liability for any losses beyond this initial investment. linear regression The process of fitting the best possible straight line through a series of points. liquidity Any asset that can be sold without causing a significant price change and with minimum loss of value.

liquidity constraints Liquidity is the ease with which an asset can be turned

Glossary 675

into cash. Sometimes assets are tied up and cannot be converted to cash.

elements that tend to make an individual a good manager.

segmentation and consumer behaviour.

liquidity event The way in which an

managerial successor A successor

marketing mix Actions a marketer

investor plans to close out an investment. Liquidity event is also known as ‘exit strategy’.

to a venture who is interested in efficiency, internal control and the effective use of resources.

loan payable Current instalment on

manufactured capital Physical means of production that can be acquired or found in nature, e.g. tools, clothing, shelter, irrigation systems, dams, roads, boats, ports and factories.

can take to promote a brand or product. Usually referred to as the 4Ps: Price, Product, Promotion and Place, they could today be replaced with 4Cs: co-creation, communities, customisation and choice.

a long-term debt that must be paid this year; part of the current liabilities.

loan with warrants Provide the investor with the right to buy shares at a fixed price at some future date. Terms on the warrants are negotiable.

LOHAS consumers Consumers (or customers) who lead lifestyles of health and sustainability (LOHAS).

Long Tail Potential customers that seek goods with unusual characteristics, whose needs can now be met through reduced marketing costs (Internet) and distribution costs.

long-term debt Usually loans maturing in the three to five year range used to finance the purchase of property or equipment, with the purchased asset serving as collateral for the loans.

long-term liabilities Items or longterm debt on a balance sheet that fall due or require paying-off beyond a timeframe of one year.

loss leader pricing Pricing the product below cost in an attempt to attract customers to other products.

M macro view of entrepreneurship Examines the huge array of external processes and factors that are sometimes beyond the control of the individual entrepreneur, such as the environment and financial markets. (See also external locus of control.)

management succession The transition of managerial decisionmaking in a firm, one of the greatest challenges confronting owners and entrepreneurs in family businesses.

management team The founders of a new venture who plan on managing the company, as well as any advisers, consultants or members of the board. managerial mind-set All the psychological characteristics and

Glossary

market A group of consumers (potential customers) who have purchasing power and unsatisfied needs. (See also market niche.)

market capitalisation Price per share multiplied by the total number of shares outstanding; also the market’s total valuation of a public company.

marketing philosophy The foundational idea that drives the marketing department. There are three major marketing philosophies: is it product-focused, sales-focused or consumer-focused? Sometimes called the ‘marketing orientation’.

marketing planning Process of determining a clear, comprehensive approach to the creation of customers.

market failure Situation where a market does not efficiently allocate resources to achieve the greatest possible good.

marketing research A gathering of information about a particular market, followed by an analysis of that information.

market gap Synonym for niche

marketing segment The segment of

market or market niche, an identifiable market segment that addresses customer needs not being addressed by competitors.

market niche A homogeneous group of consumers with common characteristics. market penetration A growth strategy achieved by winning the competitors’ customers (part of their market share) through lower prices, by attracting non-users or convincing current clients to use more of your product/service.

market segmentation The process of identifying a specific set of characteristics that differentiate one group of consumers from the rest.

marketability The extent to which a company is able to successfully identify and target customers who will recognise a need and be prepared to pay for a product or service intended to be provided by the company. marketing concept An overall marketing approach that manages a customer’s entire experience with a product or a company through a marketing philosophy and through scientific knowledge of market

a business plan that describes aspects of the market such as the target market, the market size and trends, the competition, estimated market share, market strategy, pricing, and advertising and promotion.

marketing stages Most emerging ventures go through four marketing stages: entrepreneurial marketing, opportunistic marketing, responsive marketing and diversified marketing. Each stage requires a different strategy and the entrepreneur must adjust accordingly. marketing strategy The general marketing philosophy of the company should be outlined to include the kinds of customer groups to be targeted by the initial intensive selling effort; the customer groups to be targeted for later selling efforts; methods of identifying and contracting potential customers in these groups; the features of the product or service (quality, price, delivery, warranty) to be emphasised to generate sales; and innovative or unusual marketing concepts that will enhance customer acceptance. mass customisation Refers to production of a final product or service

676 Glossary

assembled for the customer in accordance with specific preferences based on standardised mass-produced components or service modules.

mega-cities Metropolitan areas with total population in excess of 10 million people.

mergers and acquisitions A market entry strategy with two varieties. A merger occurs when two corporations join together into one, with one corporation surviving and the other corporation disappearing. An acquisition is one company taking control of another, often through an ‘unfriendly’ or ‘hostile’ acquisition.

metrics Assumptions and calculations used for any revenue projections.

micro view of entrepreneurship Examines factors that are within the entrepreneur’s ability to direct or adjust. (See also internal locus of control.)

micro-credit Small loans (microloans) to aspiring entrepreneurs who lack collateral to offer as security to a bank, who may not be steadily employed or may have no credit history.

micro-finance A full range of banking needs for poor people.

micro-management angel An investor who imposes tactics on their company that worked for them. Can be a bothersome angel.

milestone schedule segment The section of a business plan that provides investors with timetables for the accomplishment of various activities such as completion of prototypes, hiring of sales representatives, receipt of first orders, initial deliveries and receipt of first accounts receivable payments. Millennium Development Goals (MDG) The MDGs are eight international development goals which 192 United Nations member states agreed to achieve by the year 2015. They include halving the proportion of people whose income is less than one dollar a day and reversing the loss of environmental resources.

mission In an entrepreneurship context, mission is a stated mid-term

Glossary

objective that will affect or change a venture’s position by incremental steps towards a particular strategic direction.

mitigation Managing the risks of climate change, e.g. by reducing greenhouse gas emissions. (See also adaptation.)

mixed costs Part of the operating budget, a blend of fixed and variable costs. An example is utilities, since part of this expense would be responsive to change in activity and the rest would be a fixed expense, remaining relatively stable over the budget period. (See also fixed costs and variable costs.) mobile marketing The marketing of goods and services through portable wireless devices that connect to the Internet.

moral failure This form of failure is a violation of internal trust. mountain gap strategies Leveraging new and unique markets by identifying existing major market segments and going after the gaps in between larger markets.

Murabaha A term of Islamic finance. A cost-plus sale. The bank buys your machinery and then immediately sells it on to you for a profit. Used for shortterm financing, similar in form to purchase finance.

Musharaka A term of Islamic finance. Musharaka means ‘partnership’. Under a Musharaka plan, you buy the machinery jointly and gradually buy the bank out of it.

N 9/11 attacks Often referred to as

Natural Step, The An organisation and a framework setting out the system conditions for the sustainability of human activities on Earth. Natural Step Funnel A metaphor and graphic figure to help visualise the economic, social and environmental pressures that are growing on society as natural resources and ecosystem services diminish and the population’s numbers and consumption grow. near-shoring Moving jobs to a nearby foreign country.

necessity-driven entrepreneurship An entrepreneur who starts a business because there were no better options for work, rather than because s/he saw an opportunity. (See also opportunitydriven entrepreneurship.)

need to achieve People with a high need for achievement seek to excel and thus tend to avoid both low-risk and high-risk situations. need to control The strong desire entrepreneurs have to control both their venture and their destiny. negative entrepreneurship The notion that entrepreneurs undervalue biodiversity and natural resources. Rather than adding value to living materials, they only aim to reduce (e.g. through recycling) the quantity of dead resources. (See also positive entrepreneurship.) negative externality A cost imposed on people who are not part of the decision and are not considered in any way by the decision-maker. (See also positive externality.)

nine-eleven (written ‘9/11’) these were a series of coordinated suicide attacks by al-Qaeda upon the US on 11 September 2001.

nepotism The hiring of relatives in

natural advantage of nations An

over expenses during the particular period. If revenues exceed expenses, the result is a net profit. If the reverse is true, the firm suffers a net loss.

approach by which economies can achieve a competitive advantage while dramatically reducing their negative impacts on the natural environment.

preference to other, more qualified candidates.

net income The excess of revenue

natural capital Stock of natural

net present value (NPV) method A measure of the equivalent

ecosystems that yields a flow of goods or services into the future. Recognises the essential relationship between the Earth’s valuable resources and the business environment.

lump-sum value of a stream of payments over time. In effect, the NPV represents the amount that would need to be invested at a commercial interest rate at the beginning of the period of

Glossary 677

payments, such that, with accumulated interest, it would be just adequate to meet all the payments as they fell due.

they can produce what is called norm bandwagons and norm cascades which lead to substantial changes in social norms.

net profit Sometimes referred to as

note payable A list of face amounts of the promissory notes. (See also promissory notes.)

the ‘bottom line’, it is the difference between the revenue (or income from sales) and all associated business expenses including production or service delivery costs, sales, marketing, payroll, overheads, interest and taxes.

net profit margin The percentage profit a company makes for every $1 it generates in revenue or sales. net worth Sometimes called net assets, it can be applied to either individuals or firms and is the value of the difference between an individual’s or firm’s total assets and total liabilities. new business start-up A business that is newly originated by an entrepreneur in response to some form of recognised opportunity to provide products and/or services to satisfy a perceived market demand. new-new approach A start-up approach to business in which the concept is a brand-new idea to the marketplace.

new-old approach A start-up approach to business in which the concept provides a new angle to something that already exists in the marketplace.

new-venture development Essentially a start-up business launched by an entrepreneur. The first stage of a venture’s life cycle.

niche advantage See market niche. non-compete clause An agreement stating that when purchasing an existing venture the previous owner will refrain from conducting the same business within a reasonable distance for a reasonable period of time. Also known as legal restraint of trade or an agreement to not compete.

non-profit organisation An organisation whose main objective is not profit, such as a religious, charitable or educational institution.

norm entrepreneur Someone interested in changing social norms. If they are successful in their endeavours

Glossary

O one-person-band syndrome Exists when an entrepreneur fails to delegate responsibility to employees, thereby retaining all decision-making authority. operating budget A detailed projection of all estimated income and expenses during a given future period.

operating cash flows Cash generated from or used in the course of business operations of the firm. The net operating cash flows will be positive for most firms, because their operating inflows (primarily from revenue collections) will exceed operating cash outflows (for example, payment for raw materials and wages).

operating expenses The major expenses, exclusive of costs of goods sold. These represent the resources expended, except for inventory purchases, to generate the revenue. (See also selling expenses and administrative expenses.)

operational capabilities The capabilities that are inherent in maintaining the routine organisation and management of a firm in conducting its regular business. opportunity Something that an entrepreneur recognises as solving a real problem or adding value for people.

opportunity cost The cost of a resource, measured by the value of the next best, alternative use of that resource.

opportunity-driven entrepreneurship Opportunity entrepreneurship is where a person becomes self-employed due to available opportunities that the person has spotted, has prepared him or herself for and has the resources to carry it out. (See also necessity-driven entrepreneurship.)

opportunity identification The ability to recognise a viable business

opportunity within a variety of good ideas.

opportunity landscape Analysis of the process of moving innovations through to commercial markets. Analysis of the disconnect between a novel idea and the harsh rigours of the real world. Taking into account socioeconomic and technology trends in combination with the strengths and characteristics of the innovation. opportunity orientation Entrepreneurs focus on and relentlessly pursue opportunities by marshalling resources and letting their understanding guide them.

opportunity space An identified area where the ideas of an entrepreneur can visualise value creation limited only to who they are, what they know, can do and want. It is defined by the social world we live in and in particular the opportunities provided by unmet needs, trends and wants of potential customers.

owner’s equity Assets minus liabilities equals owner’s equity.

P pain Pain is the nickname for exactly what problem is being solved by your venture. Painkiller solves the pain that the customer experiences. (See also PITA products.) partnership An association of two or more persons acting as co-owners of a business for profit. patent An intellectual property right granted to an inventor giving him or her exclusive right to make, use or sell an invention for a limited time period (usually 20 years). pathways principle Belief that proper preparation in the interdisciplinary business segments will enhance the ability to recognise venture opportunities. payback method This measures the length of time taken for the return on an investment exactly equal to the amount originally invested. payments for ecosystem services (PES) PES is an umbrella term applied to schemes in which the beneficiaries, or users, of ecosystem services provide

678 Glossary

payment to the stewards, or providers, of ecosystem services.

peak resource theory Point in time when the maximum rate of extraction is reached, after which the rate of production enters terminal decline. Used for natural resources, especially oil.

peer-to-peer lending (P2P) Loans typically funded by specific individuals lending their own money on a fractional basis at interest to specific borrowers.

penetration See market penetration. persona A group of customers united by behavior patterns, goals, skills, attitudes, and a few fictional details that make the persona a realistic character.

the payment of dividends and the liquidation of assets. The word ‘stock’ is used in the US instead of ‘shares’.

prepaid expenses Expenses the firm already has paid, but that have not yet been used. For example, insurance paid on the company car every six months is a prepaid expense entry because it will be six months before the entire premium has been used.

primary data New data that is often collected by using observational or questioning methods.

pro forma balance sheet

principal The amount of the entire mortgage loan, not counting interest.

petty entrepreneurship Lower forms of social enterprises ranging from quasi-legal street peddling, which is an easy way to enter the market, to more criminal activities such as pirated DVDs and money-laundering.

private placement A method of raising capital through securities; often used by small ventures.

piracy Copyright infringement (or

product availability The extent to

that solves the customer’s ‘Pain in the Arse’. (See also pain and painkiller.)

Ponzi schemes A scam in which high returns are promised and new investors must continue to be drawn in to pay off earlier investors.

positive entrepreneurship Positive impacts brought about by entrepreneurs when they create added value through eliminating designed waste, duplication, disposability, planned obsolescence and wasteful end purposes. (See also negative entrepreneurship.) positive externality Benefit given to people who are not part of the decision and are not considered in any way by the decision maker. (See also negative externality.)

preferred shares Share that pays dividends at a specified rate and that has preference over common stock in

Glossary

earned by a firm observable over time that can be extrapolated to suggest a future profit position.

profitability The extent to which a

private offerings Raising of capital from friends, employees, customers, relatives and local professionals.

PITA products A product or service

profit trend The pattern of profit

pricing strategies (1) The evaluation of something in terms of its price. (2) How to price something.

personal failure A form of failure brought about by a lack of skill or application.

copyright violation) in a manner that violates one of the copyright owner’s exclusive rights.

financial record or account of all of a firm’s revenues and all of the expenses and costs incurred by the firm in achieving those revenues that shows the level of profit or loss produced by the firm over a period of time.

private sector entrepreneurs As opposed to public sector (governmental) entrepreneurs. which a firm will have a product or service prepared and available for sale to the intended market at the time of opening the business venture.

product-driven philosophy An entrepreneur’s perception (or philosophy) that the product and production are of primary importance in marketing and managing a company. (See also consumer-driven and sales-driven philosophy. One of three dominant marketing philosophies.)

firm or transaction will generate a return in excess of its expenses or costs. A financial statement that projects the results of future business operations, such as a pro forma balance sheet, an income statement or a cash-flow statement. The term pro forma (Latin for ‘as a matter of form’) is a term applied to practices that seek to satisfy the minimum requirements or to conform to convention. The pro forma accounting is a statement of the company’s financial activities while excluding ‘unusual and non-recurring transactions’.

pro forma statement A pro forma statement is a financial statement projecting anticipated income, expenses and cash flow for some specified future period. promissory note A promissory note (note payable) given as tangible recognition of a supplier’s claim or a note given in connection with an acquisition of funds.

property laws The laws passed by governments that govern the ownership and rights of various forms of tangible and intangible property.

professional angels Professionals

proprietary limited company (Pty Ltd) Same as private limited

such as doctors or lawyers who invest in companies that offer a product or service with which they have some experience.

proprietorship See self-proprietorship. prospectus A document, published

profile analysis The investigation of a combination of variables to highlight the major financial, market, marketing, organisational and human resource strengths and weaknesses that will influence a new venture idea’s progress to success.

profit and loss statement Also known as an income statement, it is a

company in Australia.

prior to the issue of shares to the public, which explains all aspects of a company’s business.

psychic risk The great psychological impact on and the wellbeing of the entrepreneur who is creating a new venture.

psychographics Attributes relating to personality, values, attitudes,

Glossary 679

interests or lifestyles contrasted with demographic variables (such as age and gender).

psychological disequilibrium Part of social marginality theory. Hagen says a person who experiences incidents or life experiences that demand adjustment or highlight discrimination will be more entrepreneurial. This might drive a person into enterprising behaviour to compensate for this lack. public limited company Liability limited by shares which are traded publicly in Commonwealth countries (other than Australia).

but instead make claims relative to social, cultural, historical or personal references. Moral relativists hold that no universal standard exists by which to assess an ethical proposition’s truth.

resource depletion Exhaustion of raw materials within a region.

retail outlets A retailer buys goods or products in large quantities from manufacturers or importers, either directly or through a wholesaler, and then sells individual items or small quantities to the general public or end user customers, usually in a shop. retained earnings Accumulated net

and private resources in pursuit of social objectives.

income not distributed to owners over the life of the business to date. Every year this amount increases by the profit the firm makes and keeps within the company.

R

profit divided by investment.

public sector entrepreneurship Combining public

radical innovation The inaugural breakthroughs launched from experimentation and determined vision that are not necessarily managed, but must be recognised and nurtured.

rainforest Woody native vegetation dominated by rainforest species and with a rainforest structure.

reachable market The immediate reachable group of customers that will be targeted by a new venture.

reducing emissions from deforestation and forest degradation (REDD) REDD is a market/financial system of incentives to reduce the emissions of greenhouse gases from deforestation and forest degradation.

regulatory body Every country has a regulatory regime – composed of legislation and a regulatory authority – that dictates how businesses are started, operated and wound up.

relationship intensity Stages of customer loyalty ranging from simple awareness of a product, through exploration and familiarity with the product, to commitment and finally to separation.

relativist ethics The belief that moral propositions do not reflect absolute and universal moral truths,

Glossary

return on investment (ROI) Net revenues Gross sales the business made during the particular period under review. right brain The part of the brain that helps an individual understand analogies, imagine things and synthesise information. (See also left brain.) risk See calculated risk taking, career risk, climate change risk, financial risk, psychic risk, risk aversion and risk versus reward.

risk aversion Desire to avoid uncertainty, more typical of public sector employees.

risk versus reward Within the financial capital domain, it is the tradeoff between the amount of risk taken weighed against the potential reward to be gained.

S sales forecast The projected or predicted pattern or estimate of sales at some future point or period. sales forecasting Process of projecting future sales through historical sales figures and the application of statistical techniques.

sales research Sales research is geared towards finding data required to make additional sales to a company’s existing customers. sales-driven philosophy An entrepreneur’s perception (or philosophy) that the customer and sales are of primary importance in marketing and managing a company. (See also consumer-driven and product-driven philosophy. One of three dominant marketing philosophies.) school of thought Opinion subscribed to by a group of scholars, theorists or researchers. Schumpeter Joseph 1883–1950, the Austro-Hungarian-American economist and political scientist who popularised the role of entrepreneurship within economics. Schumpeterian Someone who believes that innovation and technological change comes from the ‘wild spirits’ or ‘fiery souls’ of entrepreneurs who engage in a process of ‘creative destruction’.

secondary data Data that has already been compiled. Examples are periodicals, articles, trade association information, governmental publications and company records. seed financing Initial funds for a business concept to be developed.

rogue state A rogue state, in the

segmentation variables

most general sense, is a state that abides neither by international law nor international standards of proper governance and behaviour.

Categorising consumers by geographic, demographic, psychographic and behavioural variables in order to target specific types of people and not just people in a geographic area. (See also market segmentation.)

royalty Sum of money paid for the use of a licence, or for use of works covered by copyright, patent, registered design or trademark. rugged individualist A person who cherishes individual liberty and selfreliance.

self-efficacy Refers to an individual’s self-assessed conviction or confidence about personal abilities to muster the motivation, perform cognitive tasks and conduct the actions needed to successfully execute a specific task within a given context.

680 Glossary

self-employment Someone who is

skimming Deliberately setting a high

self-employed works for himself/ herself, not as an employee of another person or organisation, and draws income from a trade or business.

price to maximise short-term profits.

self-proprietorship The idea that you are the master of your own life, including your business. You control your own destiny.

selling expenses Expenses from displaying, selling, delivering and installing its products or performing a service.

seniorpreneur Someone who starts a business after the age of 55.

sensitivity analysis An analysis that checks to see to what extent under- or overestimated assumptions may influence cash needs and profitability and the financial strength of the business.

sequestration See carbon sequestration.

shared value Shared value treats social problems as business objectives and recognises that a prosperity of the company and the surrounding community are mutually dependent.

small-business owners As distinguished from entrepreneurs, small-business owners may once have captured an opportunity, but they then rested on their laurels. They may never grow large and they may prefer a more stable and less aggressive approach to running these businesses. Also called small-business managers.

social and cultural school of thought This school of thought deals with external factors and surrounding conditions and influences that affect a potential entrepreneur’s lifestyle.

social capital Connections within and between social networks as well as connections among individuals.

social cognition theory Cognition is used to refer to the mental functions, mental processes (thoughts) and mental states of intelligent humans. Social cognition theory introduces the idea of knowledge structures – mental models (cognitions) that are ordered in such a way as to optimise personal effectiveness within given situations – to the study of entrepreneurship.

shareholder One who owns shares in a corporation or mutual fund. The word ‘stockholder’ is used in the US instead of ‘shareholder’. The evidence is often represented by a stock or share certificate.

social discount rate A measure of the social view on how the future should be valued against the present.

shares An equity or ownership

social entrepreneur Has many of the same personality characteristics as business entrepreneurs, but is driven by a mission and seeks to find innovative ways to solve problems that are not being or cannot be addressed by either the market or the public sector.

interest in a corporation, measured in shares. Ownership of shares is demonstrated by share certificates. The word ‘stock’ is used in the US instead of ‘shares’.

sharia Traditional Islamic law. Like most religious cultures, Islam classically drew no distinction between religious and secular life. Hence sharia covers not only religious rituals, but many aspects of day-to-day life, such as business and social entrepreneurship. short-term liabilities Where the business orders some merchandise, receives it, but has not yet paid for it. This often occurs when a company receives merchandise during the third week of the month and does not pay for it until it pays all of its bills on the first day of the next month.

Glossary

social enterprise Businesses that fulfil social aims.

social entrepreneurship The art of leveraging resources to capitalise upon marketplace opportunities in order to achieve sustainable social change. Social entrepreneurs innovate and act according to the desire to create and sustain social value for others.

social impact assessment (SIA) Methods used to measure the intended and unintended social consequences, both positive and negative, of planned interventions (policies, programs, plans, projects) and any social change processes invoked by those interventions. Its

primary purpose is to bring about a more sustainable and equitable biophysical and human environment.

social innovation New strategies, concepts, ideas and organisations developed by social entrepreneurs that have a social purpose – such as microcredit and social investing. social intrapreneurs A person working in a large business or social organisation developing and promoting solutions or products that both add value to the company’s bottom line as well as to society and the planet. (See also intrapreneur.) social intrapreneurship Creating new value by developing practical solutions to social or environmental challenges within a large organisation. Sometimes called a corporate social entrepreneurship. social marginality theory Sometimes individuals or a whole social sector will be excluded by wider society and ostracised as undesirables. Social marginality theory posits that the perceived incongruity between an individual’s (self-perceived) prodigious personal attributes and the position they hold in society might propel them to be entrepreneurial.

social media marketing Describes the use of social networks, online communities, blogs, wikis and other online collaborative media as tools to promote the goods and services of a business. social return on investment (SROI) Measures the value of the benefits relative to the costs of achieving those benefits. It is a ratio of the net present value of benefits to the net present value of the investment.

social venturing A form of entrepreneurship that seeks to resolve or address social issues through the use of economic models and the practice of business-like behaviours.

socially responsible investing (SRI) Also known as sustainable, socially conscious, ‘green’ or ethical investing, is any investment strategy that seeks to consider both financial return and social good; promoting

Glossary 681

environmental stewardship, consumer protection, human rights and diversity.

sociosphere All the people in a social system, all the roles they occupy, all their patterns of behaviour, all their inputs and outputs relevant to other human beings, and all the organisations and groups they belong to.

sole proprietor of the rest of their life Controller of one’s own destiny. A free and sovereign individual.

sole tradership A sole trader (also known as a sole proprietor) is a business that is owned and operated by one person. The enterprise has no existence apart from its owner.

sovereign individuals A person or a business that is not beholden to a nation. For example, someone who resides on the Internet and selects where to reside and do business based on cost versus profit. species banking Also known as conservation banking, this generates endangered species mitigation credits by restoring, enhancing and permanently protecting threatened and/or endangered species habitats. Often used to offset unavoidable impacts from projects such as on wetlands.

stabilisation stage The ‘swing’ stage of new venture growth characterised by increased competition, consumer indifference, market saturation, ‘me too’ lookalikes and sales plateauing. Either the firm swings into higher gear or moves towards decline. stakeholder A person, group, organisation or system that affects or can be affected by an organisation’s actions. start-up New business or new venture creation – such as self-employment, a new business organisation or the expansion of an existing business – by an individual, teams of individuals or established businesses.

start-up activities The second stage of a new-venture life cycle, encompassing the foundation work needed for creating a formal business plan, searching for capital, carrying out marketing activities and developing an effective entrepreneurial team.

Glossary

start-up financing Funding for use in prototyping and product development as well as initial marketing before sales. Most start-up funding comes from the 4Fs. (See also 4Fs.) strategic alliance Any formal relationship, short of a merger or acquisition, between two companies, formed for the purpose of gaining synergies.

strategic backcasting The opposite to forecasting, this strategy formulation method assumes a future state and works backwards to identify the programs, tasks and strategies needed to reach that future. strategic entrepreneurship Focuses on large-scale, highly consequential innovations that are adopted in the firm’s pursuit of competitive advantage.

strategic formulation school of thought One of the micro views of entrepreneurship, it views strategic planning as interwoven into the entire fabric of management, not as something with a separate office and staff.

strategic intent A statement that envisions a desired leadership position for a venture for the purpose of guiding resource allocation, providing stability under changing circumstances, focusing attention on the essence of winning, motivating people by communicating value while leaving room for individual and team contributions. strategic planning The primary step in determining the future direction of a business influenced by the abilities of the entrepreneur, the complexity of the venture and the nature of the industry. strategic planning school of thought Emphasises planning, leveraging of unique markets, unique people, unique products or unique resources.

strategic positioning The process of perceiving new positions that attract customers from established positions or draw new customers into the market. strategic renewal Intrapreneurship is not just about creating new ventures, but also about transformation of organisations (strategic renewal) to put

them in a more competitive position and improve financial performance.

strategic uncertainty When there are no unified approaches to product positioning, advertising, pricing and the like, as well as different product configurations or production technologies.

stress See entrepreneurial stress. succession The process of transferring the assets of a family business to the future generation.

succession plan Process whereby the firm identifies, recruits and cultivates an internal candidate to fill key positions. Particularly important in family businesses.

Sukuk Asset-backed bonds which are structured in accordance with sharia law under a system of Islamic finance. surveys A method of collecting primary data, such as mail, telephone or personal interviews.

survivalist entrepreneurs When starting a business is the only choice or a survival strategy. sustainability The term originally applied to natural resource situations. Today, it applies to many disciplines, including economic development, environment, food production, energy and lifestyle. Basically, sustainability refers to doing something with the long term in mind (several hundred years is sufficient). Today’s decisions are made with a consideration of sustaining our activities into the longterm future. sustainability entrepreneurs Entrepreneurs who recognise, develop and exploit opportunities that create economic, ecological and social value.

sustainability performance measures Measures that many companies are required to disclose under a range of legislative and regulatory requirements and increasingly for commercial reasons because they are accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development.

sustainable design Design factors in products and services that allow

682 Glossary

entrepreneurs to reduce negative effects to the biosphere and increase netpositive contributions. (See biosphere.)

groups, each with its own legitimate perspectives, goals and dynamics.

company unique and has value to a competitor could be a trade secret.

time value of money The idea that

trademark A distinctive name, mark,

sustainable development

money available today is worth more than the same amount in the future due to its potential interest-earning capacity. Any amount of money is worth more the sooner it is received.

symbol or motto identified with a company’s product(s).

Development which seeks to produce sustainable economic growth while ensuring future generations’ ability to do the same by not exceeding the regenerative capacity of nature.

sustainable entrepreneurship (SE) An attitude towards entrepreneurial activity that thinks ecologically about the biosphere and considers the waste embodied in products.

SWOT analysis A strategic analysis that refers to strengths, weaknesses, opportunities and threats. synthesis A basic type of innovation that involves combining existing concepts and factors into a new formulation.

T taxation Liabilities owed to the government as GST (goods and services tax), sales or value-added taxes.

taxes payable The amount payable to governments or statutory bodies calculated as a percentage of income according to government-devised formulae.

technical feasibility Producing a product or service that will satisfy the expectations of potential customers. technological uncertainty The situation where no one knows which product configuration will prove to be the best, which production technology will prove to be the most efficient, or how easy it will be to develop or even copy the technological breakthroughs in the industry.

theory A well-substantiated explanation of some aspect of the natural world; an organised system of accepted knowledge that applies in a variety of circumstances to explain a specific set of phenomena.

Three-Circles Model Describes the three overlapping groups that comprise the family business system: family, business and ownership. Together with the overlaps, there are seven interest

Glossary

tipping point Levels at which the momentum for change becomes unstoppable or when a previously rare phenomenon becomes rapidly and dramatically more common. In climate change, it’s the point at which human activity brings degradation in nature, making any human reversal of the damage impossible.

tolerance for ambiguity Uncertainty compounded by constant changes introducing ambiguity and stress into every aspect of the enterprise.

tolerance for failure The iterative, trial-and-error nature of a successful entrepreneur due to serious setbacks and disappointments that are an integral part of the entrepreneur’s learning experience.

top management support When upper-level managers in a company can concentrate on helping individuals within the system develop more entrepreneurial behaviour. total customisation Involves the customer at the design stage of the product or service creation whereby the final output is unique and customised to the user’s needs without standardised inputs. total early-stage entrepreneurial activity (TEA) Also known as TEEA and devised by the Global Entrepreneurship Monitor, this is the proportion of the adult population between 18-64 years that in the last three years has started a business, still controls that business and has paid wages.

trade credit Temporary financing extended by suppliers of goods and services pending the customer settlement. trade secrets Customer lists, plans, research and development, pricing information, marketing techniques and production techniques. Generally, anything that makes an individual

trading house Trading houses are commercial intermediaries specialising in the long-term development of trade in goods and services supplied by other parties. trading trust In Australia and New Zealand, similar to a family trust; one can pay money (profits) to the beneficiaries without them having to work in the business (unlike a company). Generally taxed on a ‘flowthrough’ basis. tragedy of the commons A process of degradation of communal resources due to self-interest. traits Entrepreneurs’ traits distinguish their personal nature from others’.

transgenerational Transgenerational entrepreneurship looks at the processes that help family firms succeed beyond the first generation. Families are the dominant form of business around the world.

triple bottom line An accounting method that captures the values and criteria for measuring organisational (and societal) success: economic, ecological and social. (See also double bottom line.)

triple bottom line (TBL) indicators Estimates of a firm’s positive and negative contributions to the biosphere, such as the use of nonrenewable fuels, greenhouse gas emissions, water usage, land disturbance and so forth.

U uncontrollable failure A form of failure caused by external factors that are outside the control of employees, such as resource limitations, strategic direction and market changes.

undertaker The French verb entreprendre actually means to undertake. So the originally English translation was ‘undertaker’. Unfortunately undertaker is already used by another profession, namely funeral directors.

Glossary 683

unincorporated businesses Businesses such as a sole tradership and a partnership that are not organised and maintained as a legal corporation.

uniqueness The special characteristics and/or design concepts that draw the customer to the venture and should provide performance or service superior to competitive offerings. United Nations Framework Convention on Climate Change (UNFCCC) International environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in 1992. The treaty is aimed at stabilising greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous human-caused interference with the climate system.

Universal Declaration of Human Rights (UDHR) A document published by the United Nations in 1948 stating that all people have certain basic rights including life, liberty, equality, justice and so forth.

university-based entrepreneurship ecosystem’ (U-BEE) Refers to those elements within a university that help or hinder an individual’s choice to become an entrepreneur, such as curriculum, incubator, research institute and business plan competitions.

unlimited liability A condition existing in sole proprietorships and partnerships wherein someone is responsible for all the enterprise’s debts.

unscrupulous practices Business practices that are devoid of ethics and seek personal gain at any cost.

up-cycling Reusing a waste material in a fashion that increases its value.

upside gain and downside loss Within the financial capital domain, this is the best possible gain weighed against the worst possible loss. (See also risk versus reward.)

usage-based market segmentation A market segmentation technique that differentiates usage behaviour patterns

Glossary

of each customer or type of customer, e.g. Internet surfers or Internet shoppers.

usury The lending of money at exorbitant interest rates.

V value innovation Innovation that considers new conceptions or means to create value for customers that step outside of pre-existing or established industry and market norms and practices.

value proposition A strategic concept that accounts for the value of a firm’s product or service offering to a particular customer or to a market segment. The product or service must provide customer value in one or more terms of functionality (it must do something the customer needs to be done), emotional considerations (it must make the customer feel good by or about the purchase) or meet a set of expected ideals or beliefs (align with the value system of the customer) for a price the customer is prepared to pay.

variable cost Costs that vary with the level of production or sales, such as shipping supplies and sales commissions. Part of the operating budget, a cost that changes in the same direction as, and in direct proportion to, changes in operating activity. Direct labour, direct materials and sales commissions are examples. (See also fixed and mixed costs.)

venture capitalists People who will

vertical integration An arrangement whereby the same company owns all the different aspects of making, selling and delivering a product or service. Vietnam War A US-led effort to assist South Vietnam in repelling communist forces from North Vietnam. viral marketing Analogous to the spread of a virus, this form of marketing relies on a rapidly spread self-replicating marketing message, particularly through the Internet and social media, that creates heightened interest in a product or service.

vision In an entrepreneurship context, vision is a stated long-term objective for a venture to create or achieve an altered future that to some may seem incredible or impossible but which to the entrepreneur and others working with the venture is a very real possibility.

W water well strategies Leveraging unique resources (land, labour, capital, raw materials) that no one else has.

white knight Someone with better credit who might buy the products and resell them to you for a few percentage points. Also a company which rescues another that is in financial difficulty, especially one which saves a company from an unwelcome takeover bid.

whole systems approach Thinking

invest in a company start-up for a share of the company.

about whole systems involves shifting our attention from the parts to the whole, from objects to relationships.

venture opportunity school of thought One of the micro views of

working capital Otherwise known as

entrepreneurship. It focuses on sources of ideas and development of concepts within the context of creativity and market awareness. Developing the right idea at the right time for the right market.

venture team A group of individuals who manage a new business enterprise.

vertical analysis The conversion of an entity’s profit and loss account and balance sheet (normally for a number of accounting periods) so that the amount of each item in the accounts is represented as a percentage of the total amount.

the operating liquidity it is calculated by the difference between short-term (or current) assets and short-term (or current) liabilities. It is a measure of the financial health of a business that demonstrates that a firm has sufficient surplus of cash generated from its operations to pay its debts as they fall due.

Z zero-budget marketing Entrepreneurial marketing techniques that require few or no resources.

684 Index

INDEX A absolutist ethics 125–6 accounts payable 543 accounts receivables 541, 551–2 accounts receivable financing 504–5 accrual system of accounting 550 achievement 17, 19 drive and need to achieve 45, 52 acquisitions 432 action bias 123 adaptation 66, 67–8 adaptive businesses 387–8 business adaptation to climate change 85 strategic adaptation 19 adaptive firms 386 administrative expenses 549 adversity 45 necessity-driven entrepreneurs 40–1, 68 advertising 167, 346, 601 model 359 affiliate model 359 affordable loss 332 ‘agency agreement’ 427 alertness model of market opportunity 198–9 competing in established markets, innovation use 198 allowance for uncollectable accounts 541 ambiguity, tolerance for 46 ‘analysis paralysis’ 293 angels/angel financing 514–17 angel investor types 515–17 statistics 516 anthropocene extinction event 75 anthropogenic events 3–4 appositional relationship 207 arbitrage 195–6 Aristotle 123 ASEAN countries 175–6 Asia–Pacific region 19 business development assistance in 161 climate change restructuring effects on business environment 486 climate change situation in 67–8 corruption and business crime in 123 Corruption Perceptions Index 126 entrepreneurial centenary 413–23 entrepreneurial employee activity in 254–5 entrepreneurship across generations in 225–9 entrepreneurship indicators 414–15 Interface Ltd case study 219–20 IP regime participation 458–9

Index

rate of micro-credit activity 521 regulatory environments/challenges 453–5 spectrum of family business across 227–9 assessment 392 of industry environment 298–311 opportunity assessment 291, 293–6 assets 170–1, 539 asset protection 474 current assets 541–2 fixed assets 542–3 segregation 242 assumptions in business plans financial segments 604 challenging 206 Australia born global entrepreneurs 416 entrepreneurial activities 413–16 family businesses 228 immigrant and refugee entrepreneurs in 433 Australian Business Number (ABN) 479 Australian Competition and Consumer Commission (ACCC) 179 Australian Franchising Code of Conduct 178–9 breach 179 autonomy 270

B baby boomers 22–3 background accumulation 201–2 Bai’ al ’inah 519 Bai Salam 519 balance sheets 539–40 reasons for always balancing 544–5 understanding 540–4 bank loans 543, 544–5 Bankruptcy Act 1966 483 world carbon equivalents 5 barriers to entry 303–4 bear markets 7 behaviour consumer behaviour 342–3, 348 entrepreneurial mind and 40–3 Type A behaviour 50 Berne Convention for the Protection of Literary and Artistic Works 458 bias 123 bid rigging 127 biobanking 78 biodiversity 74–8 biotools for biodiversity businesses 399 offsets 78 world hotspots 77

biological nutrients 94–5 bio-prospecting 78 biosphere (B) 89–90 bioterrorism 4 black market rankings 456 blogging 354 Blue Economy 134 Blue Ocean Strategy 383 blueprints 602 bootstrapping 159–62, 501 business development options 160 capital need/minimisation options 160 product development options 159 born global entrepreneurs 416, 433–9 born global social entrepreneurs 439 ‘brain drain’ 432 brain use 207–8 brainstorming 205 branding 600 brand-name appeal 173 break-even analysis 566–9, 604 break-even point computation 566–9 bribery 127–8 Brundtland Report 88, 120 budgets 552 capital budgets 552, 560–6 case study 582–4 cash-flow budgets 556–8 financial budgets 552–60 operating budgets 552 building 542 build-out allowances 501 bureaucracies 258, 259 bureaucratisation versus decentralisation 388 business adaptive businesses 387–8 business assistance funding 160–1 business crime 123 business development options 160 ‘the business of business is business’ 121 ‘ease of doing business’ 454 entry pathways 159–82 Long Tail 161 promotion within 240 prospective buyers 242 quasi-incorporated businesses 478–9 repositioning 424 selling steps 241–2 stabilisation of 385 top patents influencing business 464 unincorporated businesses 475, 479–81 valuation 242

Index 685

business angels 514 business angels versus venture capitalists 516 business assistance funding 160–1 business brokers 167 business entrepreneurs 8–9 business environment 475 business failure 483 business formation 453 business management 293 business models 332 definitions, elements and perspectives 379 designing 378–80 fine-tuning 380 business planning Cocoa Samoa Ltd example 616, 625–62 common mistakes 603 contrarian views 590–2 Osterwalder’s lean canvas planning method 591–2 resources 616 business plans 510, 523 appendix/bibliography 606–13 assessment and evaluation of 608–13 Burn Your Business Plan! [book] 590–1 business description 599 case studies 619–20 complete business plan outline (CBPO) 597–8 critical risks segment 605 developmental hints 607 executive summary 598 financial segment 604–5 five-minute reading 595 full-form (full Monty) business plans 592–4 harvest strategy segment 605–6 management 603–4 marketing segment 599–602 milestone schedule segment 606 operations 602 phrases–statement versus reality 596–7 presentation – the pitch 614–16 readers of 594–7 recommendations 595 research, design, development 602 reviving Samoa’s cocoa industry 625–62 structuring 597–613 sustainability and performance measures 599 updating 614 viewpoints 594–5 what to expect 615 writing 594–7 see also sustainable business plans business strategies, disruptive 373–5

Index

business structures 476 buy/sell agreements 240

C Cantillon, Richard entrepreneur identified opportunities 195–6 on entrepreneurs 13 capabilities dynamic capabilities 378–9 of managers 238 operational capabilities 379 capital 498–9 bootstrap capital 159–62, 501 capital need/minimisation options 160 capital-seeking process 16 case study 530–1 entrepreneurial capital 498–9, 500–2, 517–22 equity capital 505–6 family capital 227 financial capital sources 500–2 financial/capital school of thought 16 human capital 574 intra-capital 256 natural capital 574 peer-to-peer lending 522–7 start-up capital 165–6 venture capital (VC) firms 21 working capital 556 capital budgeting 560–6 capital budgets 552 capital expenditures (‘capex’) 560 capitalism 14 Enviro-Capitalists [book] 120 Green Capitalists, The [book] 120 nascent capitalism 12 natural capitalism 93–4 carbon dioxide (CO2) emissions 4, 80, 454, 484–5, 576 bankruptcy laws 453 heat trapped by 4 offenders by country and region 4–5 carbon footprints 353, 576–7 calculators 577 food/product miles 577 carbon sequestration 6, 78 career path career risk 49 cognition and 40–54 entrepreneurial career 52–4 entrepreneurial mind and 40–3 parental/familial influences on choice 226 carpeting interface, case study 107–8 carrying capacity (Earth) 499, 537, 589–90 cash 541 cash flow 159, 424 cash-flow budgets 556–8 cash-flow statements 550–2, 604

Cave, Paul case study 32–3 certified green 599 champions 269 change agents 116–17 charitable trusts 482 China entrepreneurial activities 419–20 family businesses 228 franchising pros and cons 431–2 successful Chinese entrepreneurs 422–3 chlorofluorocarbons (CFCs) 129, 484 circle of life 25 classical liberalism 23 Clean Production 573 climate change 7, 63 affecting family businesses 232–3 basic problems 68–80 business adaptation to 85 Darwinian theory of entrepreneurship and 97–8 economics 80–7 effects for entrepreneurs 67–80 effects of 3 impact of 69 innovation in climate change era 213–15 legal framework regulating 484–7 restructuring effects 486 risks associated with 85–6 small climate change–dramatic increase in risk 605 social discount rate 86–7 Stern Review on the Economics of Climate Change (2006) 4, 6 see also global warming co-creation strategies 332, 333–4 codes of conduct 178–9 cognition 44 career path and 40–54 entrepreneurial cognition 44–5 collective entrepreneurship 271 co-marketing 428 commandments (intrapreneurs) 271 case study 280–1 commerce 12 ecology of commerce 93–4 Ecology of Commerce, The [book] 94 commercial banks 503–4 commercial opportunity 201 commercialisation of government companies 265 of new ventures 291 commitment 293 common shares 506 communication after a business sale 242 with community 391 with employees 51–2 failure to communicate strategy 376 ‘two-way communication’ 350

686 Index

community 232 communication with 391 community pressures 392–3 community relationships 475 community-centred planning 200 companies corporate leaders’ views of 260 entrepreneurial versus managerial 381–4 gazelles 21–2 government companies 265 growth rate 21 incorporated companies 475–9 innovation or decline 385–6 limited liability companies 475–8 private companies 475–7 public companies 477–8 responsibility of 387 scalability 22 start-up companies 26 competition 171–2, 302 case study 363 competition risks 86 competitive information 335 competitive intelligence 601–2 competitive landscape 393 competitive leverage 120 competitive pressure 334 modern landscape 593 natural advantage of nations 91–3 unattainable competitive positions 376 see also rivals competition model of market opportunity 195–6 exploiting competitive manoeuvres 196 competitive advantage 22 durable competitive advantage 332 no real 376 competitor analysis 305–6, 600 comprehensive feasibility analysis 308–11 computer crimes 127 conceptual framework (ethical decision making) 124 confidential information 468 connections 206 conservation 200 consumer behaviour 334, 342–3, 348 consumer choice 303 consumer pain 615 consumer pricing 358 consumer rights, violation of 127 consumer-driven philosophy 334 consumers consumers’ classifications 342–3 LOHAS (lifestyles of health and sustainability) consumers 353 continuous learning 393 contract enforcement 453

Index

contract manufacturing 427 contradiction 388–9 contribution margin approach 566–7 control 386, 509 companies 386 internal locus of control 46 overbearing need for 50 convenience goods 342 convertible debentures 506 cooperative societies 481 copreneurs 8 co-production 427 copyright 457, 466–9 formal registration 467 of selfies 471 under TRIPs 466–7 understanding protection 467–9 corporate angels 515 corporate entrepreneurship see intrapreneurship Corporate Entrepreneurship Assessment Instrument (CEAI) 270 corporate entrepreneurship (CE), tactics 261 corporate responsibility for a sustainable environment 122 corporate social responsibility (CSR) 121–2 goals 118 – corporate venturing 253–4 corporations 475 Corporations Act 2001 483 corpus callosum 207 corruption 123, 455 Corruption ¼ Monopoly þ Discretion – Accountability 126 Corruption Perceptions Index 126 cost cost drivers 121 cost of goods sold (cogs) 549, 554 fixed cost 554 handling questionable costs 568–9 mixed cost 554 opportunity cost 504 perceptions of high cost 375 quality versus cost versus innovation 389 variable cost 554 cradle-to-cradle (C2C) design 94–5, 214–15 creativity 17, 52 arenas 208–9 case study 220–1 channeling 208–9 creative process nature 204 creative thinking process 203 developing 204–8 entrepreneurial imagination and creativity 203–8 innovativeness and 46–7 right setting for 209

credit credit regulations 453 credit transactions 544 micro-credit 521–2 credits 545 crises 123 entrepreneurs utilising crises 7 entrepreneurship in times of crisis 64–7 global financial crisis (GFC) 42, 64, 123 opportunity in 71 critical risks 605 cross-cultural business world, ethics in 128–9 cross-licensing 428 crowdfunding 215, 523–5 incentives and disincentives 524 culture conducive culture 312 cross-cultural business world 128–9 cultural displacement 16 entrepreneurial culture case study 281–2 social and cultural school of thought 15–16 currency 566 current assets 541–2 current liabilities 540, 543 current marketing research 336–7 current sales analysis 338 customers 303 acquisition, conversion and retention 349 customer availability 296 customisation mass and total customisation 357 pricing strategies, effect on 357–8 cyber squatters 472

D Darwinian theory of entrepreneurship 97–8 de Bono, Edward, lateral thinking 204 debits 545 debt common sources 505 debt financing 502–5 debt servicing 549 debt versus equity 502–5 long-term debt 503 decentralisation, bureaucratisation versus decentralisation 388 decision making classifying decisions using conceptual framework 124 global expansion decisions, analysis 434 WIPO UDRP decisions 472–3 defects 96 deforestation 63–4

Index 687

de-growth entrepreneurship 93 delegation 52, 392 Dell Computer 340–1 demand niche exploitation 196 demand-oriented pricing 358 demographics 193 demographic trends 257 depreciation 542–3 desertification 63 design for the environment (DFE) 572 design registration 463 determination 17 perseverance and 45 diaspora entrepreneurs 432 differentiation 600 diligence 52 diplomatic immunity 123 direct foreign investment 429 disadvantaged groups, entrepreneurship and 130–1 disclosure 507 discount rate 86–7 displacement 16–17 displacement school of thought 16–17 disruptive business strategies 373–5 distribution 346 flexibility of 474 distrust 51 dividends 507 domain names 472–3 domestic impact (global market entry) 424 dotcoms 64 double/triple bottom line paradigm 116, 180 down-cycling 91 drawings 602 dreams 206 due diligence 169, 174, 510 duplication 211 durable competitive advantage 332 dynamic capabilities 378–9

E early stage financing 508 earnings multiplier 173 Earth Summit 486 eco-efficiency 572 eco-labelling 353 ecological concern 355 ecological fatalism 355 ecological footprinting 576 ecology of commerce 93–4 Deep Economy: The Wealth of Communities and the Durable Future [book] 94 ecological school of entrepreneurial thought 17 Ecopreneuring [book] 120

Index

of entrepreneurial business plans 589 entrepreneurial ecology 88–98 entrepreneurial ecosystems 311–14 industrial ecology 588 Eco-Management Audit Scheme regulation (EMAS III) 573 economy/economics Blue Economy 134 climate change economics 80–7 economic capital 499 economic development stages 20 economic displacement 17 economic growth 7 economic trends 193 entrepreneurial contributions to 7 entrepreneurial economy 19–21, 257 entrepreneurial profile 20–1 environmental economics 80–7 feudal economy 12 global economy 257 Knowledge School of economics 198 market failure in the commons 81–2 stable economies 195, 198 econosphere (E) 88–90 ecopreneurs 120 ecopreneurship 120 ecosystems 67, 122 university-based entrepreneurship ecosystem (U-BEE) 25–6 ecotourism 78, 352 education 117 educational institutions 25–6 entrepreneurship education 26 university-based entrepreneurship ecosystem (U-BEE) 25–6, 312 effectual logic 382–3 effort 168 eight wastes, lean Six Sigma and 96–7 electronic waste 7–8, 588 elevator pitch 614 embezzlement 127 emissions trading 200 emotional capital, of families 227 emotional experiences 47 employee stock ownership plans (ESOPs) 240 employees 171 non-family employees 236 employment 201 enterprise 9–10 free enterprise 14, 19 Maori Wars 134 social enterprises 19–20 social enterprises models 180–2 sustainable enterprises 52 enthusiast angels 515 entomophagy 93 entrepreneurial angels 515 entrepreneurial business plans 589 entrepreneurial capabilities/capacity 52–3, 201–3

entrepreneurial capital 517–22 financial capital sources 500–2 forms 498–9 entrepreneurial cognition 44–5 entrepreneurial ecocide 76 entrepreneurial ecology 88–98 cradle-to-cradle (C2C) design 94–5 Darwinian theory of entrepreneurship and climate change 97–8 de-growth entrepreneurship 93 frameworks 91–8 gaiapreneurship 98 industrial metabolism 96 lean Six Sigma and the eight wastes 96–7 natural advantage of nations 91–3 natural capitalism and ecology of commerce 93–4 The Natural Step 95 entrepreneurial economy 19–21, 257 entrepreneurial ecosystems 313–14 emergence 311–14 entrepreneurial ego 50–2 ‘entrepreneurial employee activity’ (EEA) 254–5 entrepreneurial ethics 123–5 entrepreneurial families rainforest clearing 6 succession and continuity 225–42 entrepreneurial green marketing [websites] 355 entrepreneurial growth 324–9, 371, 380–1 components 306 elements 291 entrepreneurs directly influence 386 key strategic driver 371 managing 384–6 entrepreneurial imagination and creativity 203–8 entrepreneurial impact loops 88 entrepreneurial leadership, achieving 393–4 entrepreneurial life cycle 53–4 entrepreneurial marketing conventional and entrepreneurial marketing, contrasting 333 defined 332–4 effective marketing components 334–5 essential nature 331 entrepreneurial mind-set 9–10, 226 Cashew case study 58–9, 364, 406–7 cognition and career 40–54 versus managerial mind-set 381 in organisations 253–9 of social entrepreneurs 118–19 entrepreneurial opportunity 194–203 assessment 291–314, 293–6, 302–3 definition 291 versus opportunity for life 306–7

688 Index

entrepreneurial process, modelling 291–3 Entrepreneurial Revolution 19–26 entrepreneurial strategy design and planning 371–8 process 372 entrepreneurial stress, definition 49–50 entrepreneurial successors 237 entrepreneurial ventures bolstering economies 7 development 291–314, 331–59, 371–401, 413–29 entrepreneurial families 225–42 entrepreneurial opportunities, assessment of 291–314 entrepreneurship within organisations 253–9 global opportunities for entrepreneurs 413–29 growth strategies for 453–87, 498–527, 537–78, 588–616 identifying legal structures 474–5 initiating 159–82, 191–215, 225–42, 253–9 legal and regulatory challenges for 453–87 marketing for 331–59 measuring performance 537–78 opportunity and creative pursuit of innovative ideas 191–215 pathways to 159–82 sources of capital 498–527 strategic entrepreneurial growth 371–401 sustainable business plan development 588–616 ‘under-taking’ evolution 10–11 entrepreneurial ventures, established acquiring 167–75 assets, state of 170–1 case study 187 competition faced 171–2 financial picture 172–3 key purchasing questions to ask 169–73 negotiating the deal 173–4 physical condition; inventory condition 170 reasons for sale 169–70 remaining employees 171 entrepreneurs ‘analysis paralysis’ 293 background 334 born global entrepreneurs 416, 433–9 born global social entrepreneurs 439 business 8–9 business plans and 594 case study 57–8 CEO to CFO 546–7 characteristics 11, 17, 45–8, 52–3 climate change economics for 80–7

Index

climate-change-oriented entrepreneurs 121 definitions 10–11, 43–8 diaspora entrepreneurs 432 directly influence growth 386 effects of climate change 67–80 ego 50–2 enterprising mind-set 9–10 entrepreneur–manager transitioning 380–4 environmental criminal entrepreneurs 129–30 ethnic entrepreneurs 130–1 experiential view of 52 facing the unknown 3–7 financial glossaries for 538–9 firm stages 53 forcing events 236–7 generations of 22 global opportunities for 413–29 governpreneurship 263 growth-oriented entrepreneurs 386 hydropreneurs 73–4 immigrant and refugee entrepreneurs in 433 Indigenous entrepreneurs 131–6 innovation and 209 key considerations for 338–9 life cycle stages 53–4 mind-set of 118–19 models 194–203 ‘norm entrepreneurs’ 83 as opportunity identifiers 291 personal preferences 167 private–corporate–public entrepreneurs, comparison 264 regulatory nightmares 455 risk confrontations 49 role in global environmental catastrophe 6–7 ‘roller coaster entrepreneurs’ 3 seniorpreneurs and copreneurs 8 small-scale entrepreneurs 6 social 8–9 stress and 49–50 survivalist entrepreneurs 130–1 sustainability entrepreneurs 119 sustainability performance measures of 571–3 utilising crises 7 vision 239 entrepreneurship 120–1, 258 ages of 42 approaches 14–19 the dark side 48, 128–9 Darwinian theory of 97–8 de-growth entrepreneurship 93 disadvantaged groups and 130–1 a dynamic process 377 early definitions 13–14 entrepreneurship framework 227

entrepreneurship theory 14–15 ethics and 121–3 evolution and revolution 3–26 experiential pathways 159 failure to communicate strategy 376 family framework 227 franchise into 175–9 green entrepreneurship 353 green internet business 353 historical perspectives 11–13 as if the planet matters … 63–4 industrial entrepreneurship (IE) 88 interdisciplinary nature 15 macro and micro views 15–19 negative 90–1 within organisations 253–9 pathways to 22–5, 233–5 positive 90–1 public sector entrepreneurship 263–5 schools of thought 15–19 social and ethical 115–36 sustainable development and 63–98 sustainable entrepreneurship (SE) 88 time-dependent nature of 52 in times of crisis 64–7 transgenerational entrepreneurship 226 universities 25–6 see also entrepreneurial ventures entrepreneurship education 26 entropy 90 environment business environment versus strategy 388 design for the environment (DFE) 572 entrepreneurs protecting 78 Enviro-Capitalists [book] 120 environmental issues 63–4 environmental protection 453 environmental trends 193 global environmental catastrophe 6–7 improvement–natural advantage of nations 91–3 environmental, social and governance (ESG) 520 environmental crime 129–30 major offenders 130 environmental criminal entrepreneurs 129–30 environmental economics 80–7 environmental impact assessment (EIA) 573 environmental management system (EMS) 573 environmental sustainability 232–3 equipment 543 equity debt versus equity 502–5 equity financing 502, 505–7

Index 689

equity capital 505–6 established markets competing in 198 disrupting 197 ethic networks 432–3 ethical entrepreneurship 115–36 ethics in the cross-cultural business world 125–8 entrepreneurial ethics, defining 123–5 entrepreneurship and 121–3 ethical dilemmas 124–5, 214 ethical wealth creation 123 relativist or absolute ethics 125–6 ethnic entrepreneurs 130–1 eureka factor 202 Euromonitor Global Consumer Trends 354 evaluation 202–3, 338 of business plans 608–13 evaluative factors for VCs 511–12 new-venture proposals 511–14 objective evaluation, lack of 296 process 297–9 strategic evaluation of patent plan 466 of venture capitalists 513–14 exercise 52, 206 existential risks 3–4 exit strategy 241 expansion financing 508 expenses 547 administrative expenses 549 expense (purchase) forecasts 554 operating expenses 549, 554–6 prepaid expenses 542 selling expenses 549 experience 52, 371 experimentation 344 expertise, lack of 375 ‘exploitation literature’ 293 export 425–8 case study 443 export consortium 428 export management company 426 extension 211 external locus of control 15 external optimism 51 extinction probability 4 extra-processing 96–7

F Facebook 163–4 Social Network, The [movie] 164 factor X 572 factoring 505 factors of production 498 failure 257 business failure 483 celebrating 206

Index

environment that allow 387–8 failed entrepreneurs 48 fear of 20, 118 market failure (resource protection) 81–2 moral, personal and uncontrollable 388 tolerance for 46 fair dealing 468 fair market value 169 fair trade 200 fair use doctrine 466, 468 families family and social risk 49 family capital types 227 getting money from 500–1 influence on children’s career choice 226 parental influence 225–6 recycling wealth within 240–2 ‘familiness’ 226 family businesses across Asia–Pacific region 227–9 advantages and disadvantages 231 in age of environmental sustainability 232–5 case study 246–8 challenges 229–33 complex challenges 230–1 family members 235–6 forcing events 236–7 non-family employees 236 outside help 240 pressures and interests inside/outside 235–6 stewardship in 233 sustainable–sustainable family business 233 Three-Circles Model 230 timelines 232 trade sale of 241–2 fatal strategic flaws (FSFs) 376 fear 20, 118, 168, 299–300 feasibility criteria analysis 307–8 key fundamentals and specific activities 309 feasibility studies 437–8 feedback, seeking 46 finance 508 accounts receivable financing 504–5 angel financing 514–17 availability of 312 business assistance funding 160–1 business plans financial segments, assumptions 604 case study 491 credible financials 557–8 debt financing 502–5 equity financing 502, 505–7 finance companies 505 financial analysis 241

financial assistance 173 financial capital of families 227 financial picture 165–7, 172–3 financial risk 49 financial/capital school of thought 16 financing activities 550 Islamic finance 517–19 key financial statements 539–52 poor financial understanding 297 raising 474 securing 438–9 start-up funding 604 financial budgets, preparing 552–60 financial performance, measurement 537–9 financial ratios 172 analysis 570–1 financial statements 537 First Gulf War 64 first-time buyer uncertainty 299 ‘Five Capitals’ model 498 Five Forces Model 302 applications 302–3 fixed assets 542–3 fixed cost 554 case study 584 flexibility 388 flow-through taxation 478 focus groups 347 food 78–80 food entrepreneurs 79 footprinting carbon footprints 353, 576–7 ecological footprinting 576 forecasting 338 expense (purchase) forecasts 554 sales forecasts 552–4, 601 foreign agents 427 foreign distributors 426–7 case study 443–4 foreign exchange, diversion of 127 foresight 192 formal financial institutions 521 Fortune 500 7 fossil fuels 4, 73, 80, 485 4Fs 501–2, 514 franchise 175–9, 431–2, 482 advantages 176 Asian franchise opportunities 175–6 case study 187–8 Coffee Club 177–8 disadvantages 176–8 franchise fees 175, 177 franchise law 178–9 franchisor control 178 green franchise opportunities 179 operation of 175–6 unfulfilled promises 178 franchisees 175 franchisors 175

690 Index

free enterprise 14, 19 freedom, human 22 freemium model 358–9 free-rider 82 full-form (full Monty) business plans 592–4 funders/funding business assistance funding 160–1 business plans and 594 crowdfunding 524 late-stage funding 508 start-up companies 500 start-up funding 604 timing of funds for venture process 295 turn downs from funders 616 funnel model 349

G gaiapreneurship 98 gain 167 see also loss gazelles 592 case study 32 impact of 21–2 myths 21 Gekko, Gordon, ‘Greed is good’ 123–4 generalised Darwinism 97 Generation Alpha 22 Generation X 22–3 Generation Y 22–3 Generation Z 22 generations 22–3 geo-engineering case study 103–7 get-rich-quick scheme case study 139–42 Global Commission on the Economy and Climate 122 Global Corruption Report 126 global economy 257 Global Entrepreneurship Monitor (GEM) 20–1, 40–1, 254, 413, 502 push/pull factors 42 wellbeing measures 43 global financial crisis (GFC) 42, 64–5, 123 family business survival 225 global greenhouse gas (GHG) emissions 79 Global Reporting Initiative, TBL indicators 575 global scouring 424–5 global sourcing 424 global warming 80 affecting family businesses 232–3 agreed-upon 2 degrees Celsius goal 4, 122 innovation and 213 small-scale entrepreneurs’ contribution 6 see also climate change

Index

globalisation 274 case study 444–5 Entrepreneurial Revolution 19–26 going global 423–33 going global motivations 423–4 goals change as goal 387 goal orientation 45 sustainable development goals/ opportunities 89 ‘going public’ 506 goods and services tax (GST), GST-free items 425 goodwill 171 government business development assistance 160–1 government companies, NZ commercialisation of 265 positive or negative effects on institutional settings 312 great chef strategies 19 Great Depression 64 green, certified 599 green business blogs 353–4 green entrepreneurial marketing 352–6 green entrepreneurship 353 green franchise 179 green marketing 352 greenfield investment 432 Greenhouse Gas Equivalencies Calculator 4 Greenhouse Gas Protocol (GHG Protocol) 576 greenhouse gases 4, 63, 79, 573 temperature and 80 greenwashing 352 gross domestic product (GDP) 40 gross profit 549 growth rates 435 growth stage 53, 385 case study 407–8 compromising strategy for 376 growth task force 389 key management issues during 386–91 growth strategies (for entrepreneurial ventures) 453–87, 498–527, 537–78, 588–616 growth wall 389–91 guerrilla marketing plan 337 guidance 173 gumboot factory 263 gut feeling 164

H habitat conservation 200 habitualness 43–4 halal finance 518 harvest plans 241 harvest positioning 241

harvest strategy 605–6 haves and have nots 274 high energy level 46 high-growth ventures 295 Hindle, Kevin entrepreneurial process model 292 ‘Hindle’s scorecard’ exercise 310–11 hire purchase 505 Hong Kong entrepreneurial activities 417 family businesses 228 horizontal analysis 571 human capital 312, 499, 574 of families 227 human freedom 22 human resources 499 human-induced climate change 3 humour 206 ‘hypothesise and test’ approach 296

I ideas 206, 259–60, 263, 457 copyrightability of 467 idea experience 202 innovative ideas sources 192–4 search for opportunity and 192–4 weak ties and 292 When is an idea not an opportunity? 296–7 identity theft 127 Ijara 519 illegal actions 129 imagination 203–8 ‘impact investors’ 519–20 implementation 202–3 importing 424–5 Inc. 475 incentive(s) 83–4 income 543 net income 547 income statements 545–7 understanding 548–52 income tax estimates 549–50 incongruity 193 incorporated companies 474, 475–9 incorporated limited partnerships (ILPs) 478–9 incorporation 474 incremental innovation 268 developing and supporting 269 incrementalist approach 423 independence 43 India entrepreneurial activities 420 family businesses 228 family businesses, grooming the younger generation 227–8 Indian entrepreneurs and NPV 562–3 Indigenous entrepreneurs 131–6 in Australia 132–3 indirect exporting 425–6

Index 691

individualism 11 rugged individualists 13 Indonesia, entrepreneurial activities 417–18 industrial ecology 588 industrial entrepreneurship (IE) 88 industrial metabolism (IM) 96 Industrial Revolution 4, 12, 68 Creating the Next Industrial Revolution [book] 93–4 industry case study 319 misunderstanding attractiveness 376 more complex industry value web 301 new and emerging industries, characteristics 298–9 value chain 300 industry changes 193 industry environment assessment of 298–311 evaluation 300 inertia 90 informal financial service providers 521 informal investors 501–2 information competitive information 335 information-gathering instrument 345–6 interpretation and reporting 346 marketing information system 338 primary data 344–6 secondary data 343–4 sources 168 infrastructure infrastructure support 312 research and development (R&D) 419 infringement budgets 465 initial public offering (IPO) 506 innovation 11–12, 14, 117, 258 in action 212 desire to be innovative 387–8 developing venture/innovation teams 271–2 disruptive innovation 210–11 encompassing new/existing markets 19 encouraging 268–9 entrepreneurial ventures and 191–215 entrepreneurs and 209 in era of climate change 213–15 gazelles as leaders 21–2 global nature 509 innovation or decline – companies 385–6 innovation teams (I-teams) 267, 271–2 innovative intrapreneurial atmosphere 260–1 innovativeness, creativity and 46–7

Index

major misconceptions 211–12 platform 268–9 principles 212–13 process 210–13 quality versus cost versus innovation 389 radical versus incremental 268 social 199 sources 194 successful innovator factors 263 types 211 value of patent innovation 465 value-creating innovation 332 innovation model of market opportunity 196–7 disrupting established markets 197 insight 199, 296–7 insolvency 483–4 institutional support 312 intellectual property (IP) international protections for 455–9 IP regimes 458–9 opportunity from changing intellectual property attitudes 473–4 pirating of 127, 456 intellectual property rights 456 interactive learning 263 interest 539 interest expense 549 Intergovernmental Panel on Climate Change (IPCC) 7, 486 internal locus of control 17 internal rate of return (IRR) method 561, 564–5 International Intellectual Property Alliance (IIPA) 456 international labour standards 200 International Organization for Standardization 120 international protections (for IP) 455–9 international trading regulations 453 Internet 347 marketing on 347–52 segmentation and customer behaviour 348 intra-capital 256 intrapreneurial strategy 265–74 five steps to 267–72 integrative model 266 intrapreneurs 15–16 characteristics 256 commandments 271 Pinochet’s views 256–7 rise of 257–8 intrapreneurship in Asia 258–9 defining concept 253–7 developing managers for 270–1 innovative intrapreneurial atmosphere 260–1 obstacles 262–3

right workplace for 269–70 social intrapreneurship 272–4 ‘intraprise’ 256 intuition 164 invention 211 high-technology inventions 510 inventory 96, 170, 542 investment 295, 542 direct foreign investment 429 greenfield investment 432 informal investors 501–2 Investing activities 550 investor protection 453 socially responsible investing 201 IPO (initial public offerings) 240–1 Islamic finance 517–19 financial terminology 518–19 ISO 14000 573 ISO 26000 Social Responsibility standard 120 I-teams 267, 271–2

J Japan, entrepreneurial activities 420 job creation 7 joint production 427–8 joint venture (JV) 428–9

K key performance indicators (KPIs) 573 Knoema Data Visualisation 413 knowledge 457 knowledge, lack of 375 knowledge accumulation 201–2 Knowledge School of economics 198 knowledge-based concepts 194 Korea, entrepreneurial activities 421 Kyoto Protocol 485, 487

L labour regulations 453 laissez faire attitude 121 land 542 landholding 12 lateral thinking 204–5 late-stage funding 508 law franchise 178–9 property laws 453 law–ethics ethical dilemma 124–5 vignettes 125 leadership enabling leadership 312 entrepreneurial leadership 393–4 strategic, visionary and managerial leadership 394 Lean Canvas 591–2 lean Six Sigma, eight wastes and 96–7 left brain hemisphere associated processes 207 skills 208

692 Index

legal advice 240 legal and regulatory challenges, for entrepreneurial ventures 453 legal forms 482 legal issues 297 legal restraint of trade 169 liability 539–40 current liabilities 543 long-term liabilities 543 see also limited liability liberalism 23 licensing 430–1, 453 advantages and disadvantages 430 life cycle 53–4 changing priorities and purchases in the family life cycle 342 life-cycle segment 349 pricing for the product life cycle 358 life cycle assessment (LCA) 572 life cycle stages 384–5 life versus entrepreneurial opportunity 306–7 lifestyle ventures 295 lifestyles of health and sustainability (LOHAS) market 233 Lima Call for Climate Action 486 limited companies 543–4 limited liability 474 limited liability companies 475–8 limited liability partnerships (LLPs) 478 limited partnerships 478 linear regression 552–3 LinkedIn 163–4 liquidity 506 liquidity constraints 332 liquidity event 241 litigation risks 86 loan payable 543 loan with warrants 506 local offices 427 logic 382–3 LOHAS (lifestyles of health and sustainability) consumers 353 Long Tail 161 long-term liabilities 540, 543 long-term stewardship 233 loss 604 affordable loss 332 global value losses of currency 566 loss leader pricing 358 upside gain and downside loss 167 see also gain

M macro view (of entrepreneurship) 15–17 Madoff incident 123 Malaysia entrepreneurial activities 418 family businesses 228–9

Index

management business management 293 of entrepreneurial growth 384–6 export management company 426 key management issues during growth stage 386–91 management succession 234 management support 270 managing paradox and contradiction 388–9 time management 392 top management support 269 unique managerial concerns of growing ventures 391–3 management team 605 managerial leaders 394 managerial mind-set versus entrepreneurial mind-set 381 managerial successors 237 managers capabilities of 238 developing for intrapreneurship 270–1 manufactured capital 499 manufacturing case study 442–3 contract manufacturing 427 Maori entrepreneurs 133–5 entrepreneurs 133–5 market entry, barriers 303–4 market failure 81–2 marketing aspects for business plans 599–601 co-marketing 428 components 334–5 conventional and entrepreneurial marketing, contrasting 333 entrepreneurial skills 332 for entrepreneurial ventures 331–59 green entrepreneurial marketing 352–6 on the Internet 347–52 Internet marketing 347 marketing concept 334 marketing information system 338 marketing materials 601 marketing mix 347 marketing philosophy 334–5 marketing strategy 600 marketing vision 599 mobile marketing 351–2 viral marketing 349 zero-budget marketing 332 marketing plans development 336–43 guerrilla marketing plan 337 marketing research 343–7 current 336–7 defining purpose and objectives 343 information interpretation and reporting 346 marketing research questions 346–7

primary data gathering 344–6 secondary data gathering 343–4 marketplaces, niche advantage in 11 markets 332, 346 Australian franchise markets 178 bear markets 7 disrupting established markets 197 fair market value 169 lifestyles of health and sustainability (LOHAS) market 233 major market segments 19 market capitalisation 86 market changes 193 market gap 119 market niches 291 market segmentation 334, 339–41 market share 423–4 market size 122 market utility expansion 200 market-based opportunity 194–203 new products in new markets, linking strategy to 383–4 notorious Asian markets 457 ‘product-market fit’ 43 product-market matrix 382 reachable market 615 size and trends 599–600 target markets 339 unique markets 19 venture capital markets 507–14 venture friendly markets 312 volatility of 506 mass customisation 357 material flow analysis (MFA) 573 mean 346 measuring performance 537–78 median 346 mega-cities 67 member-owned organisations 521 men, involved in early stage ventures 41 mental disorders 48 mergers 432 MET (Materials, Energy and Toxicity) Matrix 573 metabolism 96 metrics 615 micro view (of entrepreneurship) 17–19 micro-credit 521–2 workings 522 microfinance 200 micro-management angels 515–16 milestone schedule 606 mind incubation process 202 minipreneurship 161–2 minipreneurs, rise of 162 mission 118 mitigation 66 mixed cost 554 mobile marketing 351–2 mode 346

Index 693

models 602 monthly expenses 165–6 Montreal Protocol on Substances that Deplete the Ozone Layer 484 morality 124, 179 moral failure 388 mores 124 motion 96–7 motivation (entrepreneurial) 41 mountain gap strategies 19 ‘mum and dad’ operations 225 Murabaha plan 518–19 Musharaka 519 MySpace 163–4

N nascent stage 53 National Research Council (US) 6 national treatment 459 natural advantage of nations 91–3 natural capital 499, 525–7, 574 in a can of cola 527 sources 525–6 natural capitalism 93–4 Natural Step Resource Funnel 95, 400 near-shoring 424–5 necessity-driven entrepreneurs 68 negative entrepreneurship 90–1 negative externality 82 nepotism 231 net income 547 net present value (NPV) method 561, 562–4 net profit 547 net profit after taxes (NPAT) 547 network knowledge 199 networking 50, 51 ethic networks 432–3 new business start-up 163–7 new venture creation 253 New Zealand entrepreneurial activities 416–17 kiwifruit case study 492 new-new approach (to ventures) 163–4 new-old approach (to ventures) 164–5 newspaper ads 167 NextGens 235 niche advantage 11 9/11 attacks 64 ‘non-compete clause’ 169 non-governmental organisation (NGOs) 521 non-profit organisations 180, 474 non-utilised talent 96 note payable 543 nuclear war 4

O Office of the Franchise Mediation Adviser (OFMA) 179 off-the-shelf e-commerce software 161

Index

one-person-band syndrome 391–2 online pricing 358–9 openness, lack of 375 operating budgets 552 operating cash flows 550 operating expenses 549, 554–6 operational capabilities 379 opportunity 52 analysing landscape 298 attractiveness of 303 from changing intellectual property attitudes 473–4 climate risk and opportunities 85–6 in crises 71 entrepreneurial ventures and 191–215 examining 167–8 ideas and search for 192–4 market-based opportunity 194–203 opportunity orientation 45 opportunity space 65–6 opportunity-driven entrepreneurs 40 perception of 387 ‘rules of thumb’ 294 venture opportunity school of thought 18 When is an idea not an opportunity? 296–7 opportunity assessment critical factors 294–6 elements 291 Five Forces Model application 302–3 method 293–6 opportunity cost 504 opportunity identification 192 opposites attract 206 optimism 257 unrealistic 51 organisations entrepreneurial mind-set in 253–9 entrepreneurship in large organisations – oxymoron? 253 entrepreneurship within 253–9 organisational boundaries 270–1 organisational thinking, re-engineering 259–63 OTOP (One Tambon [village], One Product) 161 overproduction 96 owners’ equity 539

P palm oil production 63 paradox 388–9 parental influence 225–6 partnership strategies 332 partnerships 474, 480–1 incorporated limited partnerships (ILPs) 478–9 limited liability partnerships (LLPs) 478 limited partnerships 478

passion 47, 53 Patent Cooperation Treaty (PCT) 458, 462 patents 457, 459–66 broad coverage 465 case study 491–2 notable 462–3 patent exclusivity duration 462 patent strategy – six rules of 465–6 process and notes 460–2, 465 ‘second-tier’ patent system 462 top patents influencing business 464 pathways principle 18 payback method 561–2 payments for ecosystem services (PES) 78 peak resource theory 84–5 peer-to-peer lending (P2P) 522–7 penetration 358 ‘People’ 574 people ‘structural holes’ between similar 119 unique people 19 perception of opportunity 387 perceptual changes 193–4 performance measurement break-even analysis 566–9 capital budgets 560–6 financial budgets 552–60 financial performance measurement 537–9 financial ratio analysis 570–1 key financial statements 539–52 objectives 537 sustainability performance measures 571–3, 576–8 triple bottom line performance measures 574–6 permits 453 perseverance, determination and 45 personal failure 388 personal preferences 167 personal relationships 475 PESTLE analysis (Political, Economic, Sociocultural, Technological, Legal and Environmental analysis) 298 petty crime entrepreneurship 128–9 Philippines, entrepreneurial activities 418–19 philosophy consumer-driven philosophy 334 individualistic political philosophies 23 marketing philosophy 334–5 production-driven philosophy 334 sales-driven philosophy 334 physical risks 85–6 piggybacking 164 Pinochet, Gifford Intrapreneuring [book] 260 intrapreneurs views 256–7, 263

694 Index

piracy 127, 456, 474 PITA products 163 Plan-Do-Check- Act Cycle (PDCA) 573 ‘Planet’ 574 platform innovation 268–9 Plato 123 policy, enabling policies 312 Political, Economic, Social and Technology (PEST) factors 298 political instability 455 politics political displacement 16 political trends 193 Ponzi schemes 123, 128–9 population 68–72 opportunity and 71 target populations 180 Porter, Michael E. Five Forces Model 302–3 industry assessment 299–311 ‘positioning’ 241 positive entrepreneurship 90–1 positive externality 82 poverty 7 preferred shares 506 prepaid expenses 542 price 169, 358 pricing for the product life cycle 358 pricing online 358–9 pricing rationale – business plans 600–1 pricing strategies 357–9 price fixing 127 primary data gathering 344–6 principal 505–6 Principles for Responsible Investment (PRI) 520 prioritisation 392 private (business) sector 117 private companies see proprietary limited company 475–7 private offerings 506 private placement memorandum (PPM) 507 private placements 507 pro forma balance sheets 604–5 problem solving creative 164 persistent 45 using commercial opportunity 201 procedures creation 392 process needs 193 production Clean Production 573 co-production 427 joint production 427–8 production-driven philosophy 334 product(s) 347 availability of 296 new products 343

Index

new products in new markets, linking strategy to 383–4 PITA products 163 product development options 159 product life cycle 358 ‘product-market fit’ 43 product-market matrix 382 unique products 19 professional (information) sources 168 professional angels 516 profile analysis 306–7 ‘Profit’ 574 profit 116, 179, 604 distribution 117–18 gross profit 549 maximisation 423 net profit 547 net profit margin 172 profit trend 172 return on net worth 172–3 sustainability and 122–3 ‘profit and loss statement’ (‘P&L’) 546 profitability 172 finance options affecting 503 pro-forma statements 558 projected earnings 173 promissory notes 500 promotion 240, 601 property laws 453 proprietary limited company (Pty Ltd) 476 prospectus 242, 507 protection asset protection 474 entrepreneurs protecting environments 78 investor protection 453 protections for intellectual property 455–9, 465 resource protection 81–2 understanding copyrights protection 467–9 psychic risk 49 psychographics 340 psychological disequilibrium 131 public (government) sector 117 public companies 477–8 public offerings 506–7 public sector entrepreneurship 263–5 purchase forecasts 554

Q quality versus cost versus innovation 389 quasi-incorporated businesses 478–9 questionnaires 345–6

R radical innovation 268 developing and supporting 269 radical plans 197

rainforests 63–4, 76, 122 reachable market 615 recession 7, 64–5 Eisenhower recession 64 recycling 240–2 reducing emissions from deforestation and forest degradation (REDD) 78 regression analysis 552–3 regulatory bodies 474 regulatory issues 297 regulatory risks 86 reinforcement 270 relationships intensity of 349 personal and community 475 recognising 206–7 relativist ethics 125–6 reputation risks 86 research for foreign market entry plans 434–7 marketing research see marketing research 343–7 research and development (R&D) 163 infrastructure 419 resources 393 availability of 162 for business planning 616 Earth’s resources 395 human resources 499 peak resource theory 84–5 resource protection – market failure in the commons 81–2 safeguarding 537 scarce resources 72 special resources (over long term) 19 unique resources 19 retail outlets 428 retained earnings 544 return on investment (ROI) 350, 509–11 return on net worth 172–3 revenues 117–18, 547, 548 revenue drivers 121 rewards 270, 387 risk versus reward 167 right brain hemisphere associated processes 207 skills 208 rights consumer rights 127 copyrights 466–9 Universal Declaration of Human Rights (UDHR) 78 risk 43 calculated risk taking 45, 46 climate risk and opportunities 85–6 confrontations for entrepreneurs 49 critical risks segment – business plans 605 existential risks 3–4 identification 293 risk versus reward 167

Index 695

small climate change–dramatic increase in risk 605 rivals 302 rogue states 456 royalties 430–1

S sales 346 case study 363–4 current sales analysis 338 sales forecasting 338, 552–4 sales growth 295 sales strategy 601 sales-driven philosophy 334 sanitation 72 Sarasvathy, Saras, effectual logic 382–3 scalability 22 scaled questions 346 scandals 123 scarce resources 72 Schumpeter, Joseph, on entrepreneurship 13 seas/oceans, rising/warming 6 secondary data gathering 343–4 seed financing 508 segmentation smartphones 348 usage-based market segmentation 347 variables 341 self-belief 46 self-efficacy 25–6, 40, 53 self-employment 24 selfies 471 self-proprietorship 24 selling expenses 549 seniorpreneurs 8 sensitivity analysis 558–60 sequestration 6, 78 shared value 272–4 examples 273 shared vision 267, 387 shareholders 504, 574 shares 500, 506 case study 531–2 in limited companies 543–4 sales of 545 sharia 518 shopping goods 342 short message service (SMS) 351 short-term focus 334 short-term liabilities 540 short-time horizon and strategic uncertainty 299 Singapore, entrepreneurial activities 421 sketches 602 skills, lack of 375 skimming 358 skunkworks 263 slavery 12

Index

small and medium enterprises (SMEs) 228, 375–6, 518 small-business owners 9 smartphones 348 smuggling 127 social (and family) risk 49 social (non-profit) sector 116, 117 social business 116 social capital 499 of families 227 social cognition theory 44 social discount rate 4, 86–7 social enterprise models 180–2 technology meets 165 social entrepreneurs 8–9 as change agents 116–17 unreasonableness 119 social entrepreneurship 116–18 popularity 180 social entrepreneurship activity (SEA) 117 social groups 16 social impact assessment (SIA) 577–8 social innovation 199 social intrapreneurs 118 commercial possibilities 274 social intrapreneurship, by shared value creation 272–4 social justice 122 social marginality theory 131 social media 163–4 social media marketing 349–50 key distinctions 350 marketing 349–51 plan development 350–1 plan steps 350–1 social need model of market opportunity 199–201 social return on investment (SROI) 577–8 social venturing 179–82 socially responsible investing (SRI) 201, 520 societal norms 124 society economic and social mainstream of 19–20 social and cultural school of thought 15–16 societal trends 192 sociosphere (S) 88–90 Socrates 123 sole proprietors 10 sole traderships 474, 479–80 sources of capital 498–527 sovereign individuals 13, 23 specialty goods 342 species banking 78 species extinction 75 sponsors 594

stabilisation 385 stable economies 195, 198 stakeholders 574 business plans and 593 crowdfunding incentives and disincentives 524 start-up companies 26 funders/funding 500 high-tech start-ups, blueprints for 390–1 start-up financing 508 start-up funding 604 statement of cash flows see cash-flow statements STEEP analysis (Social, Technological, Environmental, Economic and Political analysis) 298 Stern Review 4, 65 business case assessment 6 stewardship 233 strategic alliances 426 strategic backcasting 399–401 strategic entrepreneurial growth 371– 401 strategic entrepreneurship 254 strategic execution 376 strategic intent 371 strategic leaders 394 strategic management (dynamic process) 377 strategic planning 371 lack of 375 steps 372–3 strategic formulation school of thought 18–19 value of 375–8 strategic positioning 377–8 approaches 378 strategic renewal 253 strategic sustainable development 394– 401 strategic tools 399 strategic uncertainty 298 stress coping mechanisms 51–2 entrepreneurial stress 49–50 stressors 66 structural holes 119 subscription model 359 substance flow analysis (SFA) 573 success fear about successful future operation 168 overriding desire for 51 succession barriers to 234 case studies 245–6 contextual aspects 238–9 key factors 235–8 management succession 234 parallel change needed 239

696 Index

as pathway to entrepreneurship 233–5 pressures 236 secrets 229–30 sources of 237–8 succession plans 235 succession strategy development 238–40 successor qualities 239 writing strategies 239–40 Sukuk 518–19 suppliers 302–3 trade credit 504 supply and demand (balance) 195 support 269, 270, 312 supported employment 201 surplus 116 surveys 344 comparison of major survey research techniques 344–5 survival stage 53, 303 cash flow 159 survivalist entrepreneurs 130–1 sustainability 4, 120 environmental sustainability 232–3 profit and 122–3 strategic sustainable development 394–401 sustainable design 214 sustainable development 63–98, 120 sustainable enterprises 52 sustainable entrepreneurship (SE) 88 sustainable tourism 83–4 sustainable–sustainable family business 233 sustainability entrepreneurs 119 sustainability entrepreneurship, three legs of 395–6 Sustainability Helix 396–8 six strands 397–8 sustainability management stages 398 sustainability performance measures 537, 576–8 measuring entrepreneurs 571–3 sustainability strategy 401 sustainable business plans business planning, contrarian views 590–2 development 588–616 need for 588–90 sustainable development 575 SWOT analysis 373 climate change SWOT 396 synthesis 211

T Taiwan entrepreneurial activities 421–2 family businesses 229 tall poppy syndrome 48

Index

Tamaki Maori village case study 143–4 target markets 339 target populations 180 tariff reductions 459 taxation 454, 475 flow-through taxation 478 income tax estimates 549–50 tax implications 242 taxable income 543 taxes payable 543 teams/teamwork developing venture/innovation teams 271–2 innovation teams (I-teams) 267, 271–2 team-building 47–8 venture teams 267, 388 technical knowledge 17 technical nutrients 94–5 technical requirements 297 technology development of 269 disruptive technology 210 emerging technology 199 meets social enterprise 165 technological uncertainty 298 technology trends 192 temperature 4 in Australia 81 greenhouse gases and 80 land and sea temperatures 6 world predictions 80 10x rule 22 Tesla 356 Thailand, entrepreneurial activities 419 thinking lateral 204–5 organisational thinking 259–63 outside the box 205–6 THINKubate 206 ‘Third Age entrepreneurs’ 42 three Ps – People, Profits and Planet 91, 525 Three-Circles Model 230 time 168, 173 appropriate timing (for business sale) 242 availability of 270 effective succession 238 scarcity of 375 time management 392 time value of money 560 timing of funds for venture process 295 tipping point 355 top management support 269 total customisation 357 total early-stage entrepreneurial activity (TEA) index 20–1, 40–1, 254 tourism 83–4 track record, proven 173

trade 12 arbitrage 195–6 emissions trading 200 fair trade 200 information sources 168 legal restraint of trade 169 trade credit 504 trade sales 241–2 trade secrets 457, 473 trading houses 426 trading trusts 474, 481 trademarks 457, 469–71 Google parody 469 nature and distinctiveness of 469–70 pitfalls, avoiding 470–1 trademark bullying 472 Trade-Related Aspects of Intellectual Property Rights (TRIPs) 458, 462 copyright under 466–7 trademarks and 469 ‘Tragedy of the Commons’ 82, 526 training 173 traits 44–8 entrepreneurial trait school of thought 17 transgenerational entrepreneurship 225, 226 transportation 96 trend line analysis 553–4 trends 192 triple bottom line (TBL) performance measures 574–6 reporting 537 standards and guidelines 575–6 TBL accounting 574–5 trust 350 lack of 375 ‘two-way communication’ 350 Type A behaviour 50

U uncertainty 371 key strategic driver 371 uncontrollable failure 388 underachievers 18 undernourishment 79 unexpected occurrences 193 Uniform Dispute Resolution Policy (UDRP) 472 unincorporated businesses 475, 479–81 uniqueness 294–5 case study 319–20 unique managerial concerns of growing ventures 391–3 venture uniqueness, lack of 297 United Nations Framework Convention on Climate Change (UNFCCC) 485–7

Index 697

Universal Declaration of Human Rights (UDHR) 78 universities 25–6 university-based entrepreneurship ecosystem (U-BEE) 25–6, 312 unlimited liability 478 unscrupulous practices 172 unsought goods 343 up-cycling 91–2 upside gain and downside loss 167 usage-based market segmentation 347 usury 11–12

V vacations 51 value chain analysis 300–2 value chains 300 value(s) 118, 124 family values and influences 231 global value losses of currency 566 net present value 562–4 shared value creation – social intrapreneurship 272–4 value of strategic planning 375–8 value proposition 379 value/value-creating innovation 332, 384 variable cost 554 venture capital dispelling myths 509–11 in the new era 509 time to raise 510 venture capital markets 507–14 venture capital (VC) firms 21 venture capitalists (VCs) 498 business angels versus venture capitalists 516 due diligence ‘deal killers’ 510 entrepreneurs’ questions for 513–14 evaluation 513–14 objectives 511 ventures acquiring established entrepreneurial venture 167–74

Index

advantages of acquiring an ongoing venture 168–9 change as goal 387 community pressures 392–3 continuous learning 393 creating 52–4, 163–7 developing venture/innovation teams 271–2 disruptive new venture creation 163–7 effective succession and venture type 238 entrepreneurial ventures 474–5 growth stage 385 harvesting 240–2 high-growth ventures 295 joint venture 428–9 lifestyle ventures 295 long-range planning problems 375 new ventures 253, 291, 385 new-new approach 163–4 new-old approach 164–5 one-person-band syndrome 391–2 points of view 381 ‘positioning’ 241 size distinctiveness 391 social venturing 179–82 start-up activities 385 time management 392 trade sales of 241–2 typical life cycle 384 venture development stages 384–6 venture teams 267, 388 vertical analysis 571 vertical integration 501 Vietnam entrepreneurial activities 422–3 Vietnam War 64 viral marketing 349 virtual goods model 359 vision 47, 124, 269, 371 development 267 of entrepreneurs 239 shared vision 267, 387 visionary leaders 394

W waiting 96 waste eight wastes 96–7 e-waste 7–8, 588 ‘wastes’ 572 water 72–4 embodied water 73 virtual water trade 78 water well strategies 19 wealth 40, 232 recycling wealth within families 240–2 see also gross domestic product wealth creation 11–12 in Asia 227–8 ethical wealth creation 123 web plans 601 wellbeing 43, 91 ‘what if’ analysis 558–60 white knights 501 whole systems approach 499 widget strategies, better 19 women, involved in early stage ventures 41 word-of-mouth marketing 349 work discretion 270 working capital 556 workplaces, for intrapreneurship 269–70 World Bank 453, 577–8 doing business in cities statistics 455 World Business Council for Sustainable Development 354, 572 World Commission on Environment and Development (WCED) 88 World Intellectual Property Organization (WIPO) 458 World Trade Organization (WTO) 458 ‘Four Pillars’ of WTO membership 459

Z zero-budget marketing 332